









v **•. * 









r ©» A 





©« A 










;«•> v^v v^>. %^V.. v 







» ,6* ^b, 4 ^T»* A <, *••»* A 











*bv* 



y^K 



■- % ^ y HM° ***** •«&- 



XT* A ^, 'o.»» 



: ^ v ^ 



r o « * 



IP-Jl, 



' V 4 .V^ 



^•<i 















XT** A 



1 ««* 




"i 










tf* ^>«^% ^5 

















< ^% 









* 








=*" *V 



V'i.fT**^ 




A WELL-PLANNED STOREROOM 



From such a storeroom as this the orders for stock are filled at the Pullman Com- 
pany's plant. The racks are numbered to make rapid reference to their contents 
possible and the double compartments containing small articles are removable 
so as to facilitate replenishment. Emptying one side of a double compartment 
automatically signals the need of replenishment. 



HOW TO FIND 



FACTORY COSTS 



ILLUSTRATED WITH FIFTY-ONE 

CHARTS, SEVEN DIAGRAMS 

AND ONE TABLE 



J 



S 



By 



C. BERTRAND ^HOMPSON 

INDUSTRIAL CONSULTANT 




A. W. SHAW COMPANY 

CHICAGO NEW YORK 

LONDON 






SYSTEM "HOW-BOOKS" 
How to Increase Your Sales 
How to Increase a Bank's Deposits 
How to be Personally Efficient in Business (Bow to 

Systematize the Day's Work) 
How to Increase the Sales of a Store 
How to Sell More Real Estate at a Profit 
How to Sell More Life Insurance 
How to Sell More Fire Insurance 
How to Sell Office Appliances and Supplies 
How to Talk Business to Win 
How to Write Advertisements that Sell 
How to Collect Money by Mail 
How to Finance a Business 
How to Run a Store at a Profit 
How to Advertise a Bank 
How to Manage an Office 
161 Store Plans to Win New Trade 
The Business Man's Encyclopedia (three volumes) 

Others in preparation 

FACTORY "HOW-BOOKS" 

How to Get More Out of Your Factory 
How Scientific Management is Applied 
How to Cut Your Coal Bill 
The Knack of Management (three volumes) 

Others in preparation 

STANDARD VOLUMES AND SETS 
Good Will, Trade-Marks and Unfair Trading 
Buying * 

How «p Write Business Letters 
Business Correspondence * 
The Automatic Letter Whiter 

The Business Correspondence Library (three volumes) 
Credits and Collections * 
Office Methods * 
How to Find Factory Costs 
The Cost of Production * 

The Library of Office Management (four volumes) t 
Personality in Business * 
Employer and Employee * 
Organizing a Factory * 
Industrial Organization t 

The Library of Factory Management (six volumes) 
Keeping Up with Rising Costs 
The Knack of Selling (six pocket volumes) 
Selling Policies * 

The Library of Sales and Advertising (four volumes) t 
American Industries — Studies in Their Commercial 
Problems: Volume I — The Wool Industry 

Others in preparation 

THE SYSTEM OF BUSINESS 
Ten units — thirty volumes 
In preparation 

A. W. SHAW COMPANY 

PUBLISHERS OF 

SYSTEM, The Magazine of Business, and 

FACTORY, The Magazine of Management 

NEW YORK CHICAGO LONDON 



Copyright 1916 by the 
A. W. SHAW COMPANY 



* Formerly issued in 
f Formerly issued in ' 



'THE BUSINESS MAN'S LIBRARY" 
'THE LIBRARY OF BUSINESS PRACTICE' 



f*? 



'CI. A 44 5 6^1 



NOV ii 1916 



CONTENTS 



Chapter Page 

I WHAT A GOOD COST SYSTEM MEANS TO YOU . 11 

How a cost system would have saved a company $32,000 in one item alone — One 
of the chief benefits usually secured from a' good cost system correctly handled — How a 
cost system helps you to decide whether or not changes in design or method are desir- 
able — Cutting down on labor and equipment through an accurate knowledge of costs — How 
accurate costs influence the production of several lines of articles with respect to their sale 
at a profit 

n WHAT ARE COST ACCOUNTS? . . . . J . 18 

How a properly arranged cost system enables you quickly to get total factory cost 

III WHAT GOES TO MAKE UP YOUR COSTS? . . 23 

Distinguishing between "productive," "non-productive" and "superfluous" costs — 
Neglect of the "indirect cost" made a difference of thirty per cent in one business man's 
overhead — How knowledge of total cost helps to fix the selling price at a profit — The 
result of carelessness in checking job cards and how it affects the indirect labor cost — 
Making sure that job cards indicate the time actually required to perform the work — 
One manager, using a simple plan, prevented workmen from turning in excess overtime 
— Why it is of great importance to make sure that even the smallest items are repre- 
sented in your final cost figures — The use of this perpetual inventory eliminates any 
chance of material being missed — How material formerly wasted is accounted for 

IV HOW TO HANDLE INDIRECT COSTS ... 40 

Before this concern installed daily reports it was absolutely impossible to locate certain 
sources of loss — The best way to handle the rent item without charging it to 
profit and loss — Making each department bear its proper share of the indirect costs; — 
Here are a number of good ways of handling inspection costs — Here are the special 
accounts to charge with the cost of spoiled material — How to tell whether or not to 
charge tools, patterns and experimental work to direct or to indirect cost 

V WHAT ABOUT INTEREST AND DEPRECIATION? . 53 

Why interest should not be charged to cost of production — Where to draw the line 
between maintenance and depreciation — About a plant, replaceable at $12,000, which 
wa3 appraised at $40,000 — What the percentage on original cost plan does not show, 
and how to remedy this fault — Using the sinking fund method to determine the extent 
to which assets have depreciated — How to use standard rates of depreciation when based 
on normal conditions 

VI CHARGING EACH UNIT WITH ITS PROPER SHARE 70 

Adapting distribution to the purposes which exactly suit your needs — How one plant 
saved $30 a day by watching one item — What finally becomes of indirect expense — 
Investigation in one factory showed a "leak" in indirect charges amounting to 50f 
— One result of using the direct labor hours method without allowing for differences in 
cost of labor — A plan that works well where each operator tends more than one machine 
— You can easily check the accuracy of your machine hour rates by a very simple 
test — How a manufacturer doubled the effectiveness of his workmen by installing a 
complete cost system— How one man handled rush jobs accurately — and it's quite simple 



VII THE MACHINE HOUR RATE PLAN . .84 

How factory expense is computed and separated into divisions— A plan that is eas er to 
apply than some other methods you may know about — Charging the production center 
with its fair share of strictly factory expense — Machine cost as an element in the machine 
hour rate — Two good methods of distributing the administrative expense — How to use the 
annual charge of each production center against its production — Shall idle time be 
charged against special jobs or against the entire plant? — A second good method for 
charging idle time— Why using percentage figures as guides to sales helps out 

VIII HOW TO HANDLE THE COST OF SELLING . 96 

Why exact knowledge of selling costs is important in any business — Should delivery costs 
be charged to production or to sales? — The usual basis on which general selling ex- 
pense is apportioned 



IX TYING THE COSTS INTO THE GENERAL ACCOUNTS 102 

The three essentials of a successful "work in process" account — "Using a controlling account 
with varied lines of production — How a proper handling of indirect costs affects the 
success of your business — Posting the entries to the controlling accounts: an example — 
How ought "Accounts Receivable ' be subdivided without making unnecessary work? 



X AN EFFECTIVE SYSTEM OF CLASSIFICATION . 110 

The first step: classifying details and elements: and a very important one — Use of cross 
reference to facilitate recognition of proper symbols — Making it easy to remember the 
symbol — A good example of a significant symbol — Half the trick in applying these prin- 
ciples to a small plant — A clear explanation of seven systems now in use and how they 
are applied — What a well-known accountant uses as a simple system — Carrying the group 
idea to its logical conclusion — What kind of classification system is usually used in 
"scientific management" works 

XI TAKING FACTORY COSTS APART . . . . 128 

- Why "one-lung" businesses usually never get well — Do you admit the importance of 
starting with a knowledge of exact costs ? — Taking the first steps in classifying costs — 
Laying a foundation for your analysis — Analyzing auxiliary expenses in a manner that 
puts a close check on them — Where some cost systems fail to make good — How a cost 
system often saves its own cost 

XII A COST SYSTEM THAT SAFEGUARDS . . .142 

The ultimate test of a good cost system — A cost system which showed that the ink used 
on a printing job weighed just twice as much as the paper! — What an authority says about 
getting costs on finished material — A good example of how costs are summarized and 
brought together 

XIII MAKING COSTS AND BIDS AGREE ... 150 

How the installation of a cost system showed why one company lost a profitable order by 
bidding $5,000 too high — How one man developed an unusually efficient and satisfactory 
method — Determining the relative efficiency of time units — The necessity of eliminating 
variations in reporting time because of differing personalities — Simplifying the recording 
of time reports on the payroll — Why it is easy to keep a close check on contracts under 
some systems — Making the ledger show everything you want to know — One result of 
having a satisfactory cost system — How one company handles estimates accurately and 
without much red tape — A clear explanation of the difference between construction 
cost and manufacturing costs — The method used by one company to requisition material 
shipped from its warehouse — Saving one-third of the bookkeeping time in billing — 
Differentiating profit and loss from other entries — A good cost system as a remedy for 
sleepless nights — Determining the profit on work under construction — Solving a cost- 
keeping puzzle by making the entries automatic — How one unusually successful man 
watches his operating margins — Figuring the percentage of profit earned to labor invested 
— The value of a comparison of estimated with actual profits on finished contracts — 
Pitfalls to look out for when determining the equity 



HOW TO GET THE GREATEST VALUE 
FROM THIS BOOK 

The Federal Trade Commission has called attention to the 
fact that less than 20 per cent of the business concerns in this 
country have a cost system, and that a large proportion of the 
many failures recorded every year are due to the absence of an 
accurate knowledge of what it costs to manufacture and sell. 
The Commission is urging every business man to take this 
first step in the development of that primary effectiveness by 
means of which this country can alone be brought to an 
appropriate degree of industrial preparedness. 

Realizing that the very large majority of our industrial 
concerns consists of small plants unable to aif ord the kind of 
expert assistance which the larger concerns have drawn on for 
the development of their cost systems, the publishers of 
Factory and System have from time to time presented articles 
showing how simple cost systems have been and may be 
developed. These articles have usually shown applications to 
special lines of business, and, on account of this fact and the 
limitations of space, they have not individually been able to 
handle the subject in comprehensive detail. 

In preparing "How to Find Factory Costs" the services of 
a competent expert have therefore been enlisted to outline 
briefly and clearly the elements of a good cost system, in such 
a way that it can be understood and applied by the average 
manager and the average accountant of the average small plant, 
without in the least sacrificing that degree of thoroughness 
and accuracy vital to the success of any cost system. The 
book is planned to be broad enough to apply to all kinds of 



industries. It is intended to be detailed enough to be useful 
to the accountant, and at the same time to include the rela- 
tion of cost statistics to the entire effectiveness of operation, 
so as to be most useful to the factory head. 

The author, C. Bertrand Thompson, was selected on 
account of his experience in the development of cost and 
efficiency systems in a wide variety of industries, including 
machine shops, electrical specialties, shoe factories, book 
binderies, printing plants, and box factories. In addition to 
this experience, his record as a teacher of factory management 
at Harvard University, and as a writer on this and other 
subjects for Factory, System, and other magazines, proves 
him capable of conveying his practical knowledge to others in 
a form both instructive and interesting. 

In accordance with his authorization to use any articles in 
Factory and System (not already reprinted) which might 
be desirable, he has added a few of these to this book, besides 
a chapter written by F. B. Cherrington, a certified public 
accountant of Boston, who has been associated with Mr. 
Thompson in professional work. All these contributions have 
been thoroughly edited by Mr. Thompson, and the entire work 
has therefore been under his supervision. 

"How to Find Factory Costs" is written for the manager — 
the executive — as well as for the accountant. It aims to show 
you what your costs ought to tell, as well as how to devise a cost 
system for your plant. It may be used as a check on the 
system you are now using, no matter what line of business you 
are in, or as a guide to the development of a new system. 

You may find a suggestion about how you can use "How 
to Find Factory Costs" to best advantage quite helpful. First, 
carefully read the book through. When this reading is com- 
pleted, you will find it useful to read every page a second 
time. 

Second, decide what type of costs you want to get. This 
decision will depend on the type of plant you operate and you 
will select either assembling, continuous or tonnage costs. 



Third, decide whether you want your costs by yards or tons, 
or by lines, or by departments, or by operations, or by jobs, or 
by some combination of these various plans. 

This book is written in a general way for all types of 
factories and it is only by making these decisions that you can 
know surely what parts of it to apply to your own needs. The 
first steps for which to make practical provision are your direct 
labor and material costs. 

Fourth, decide which method of time-keeping you will use; 
whether a single card for all jobs, to be filled in by the work- 
man, or a separate card for each job, to be filled in by the 
workman, the foreman, or a planning department. 

Fifth, get some kind of perpetual inventory started, 
whether it be the most simple or the most complex, or some- 
thing in between. 

Sixth, devise a form of requisition on which materials will 
be issued and charged, and make and enforce a rule that no 
materials will be issued to anyone with a requisition. These 
steps will give you control of your direct labor and material 
costs. 

Seventh, study carefully the various items that enter into 
indirect costs, and see to it that you have listed all that exist 
in your plant, with no exceptions whatsoever. 

Eighth, weigh the advantages and disadvantages for your 
purposes of the various methods of distribution described, and 
decide which one or which combination you will use. Bear in 
mind that it is usually advisable to use different methods in 
different departments, when these departments are not uniform 
in respect to make-up and methods. 

Ninth, whichever method or methods of distribution you 
decide on, work them up in detail on the forms suggested, and 
test them out for awhile. Then make such modifications as 
experience shows to be desirable. While this is the most diffi- 
cult part of your job, and the one on which you should call in 
expert help if anywhere, it is by all odds the most important 
and the one which it will cost you most heavily to neglect. 



Tenth, use the forms in this book largely as suggestions. 
Draw up your first forms with the definite understanding that 
they are tentative and experimental only. Don't have them 
printed in large quantities ; if you have a blue-print machine, 
run off a limited number on it first, and use these until you are 
sure your forms are in exactly the shape you want. 

Eleventh, and finally, remember that no form has any value 
unless it is properly and intelligently used. Train your clerks 
in the meaning and nature of the philosophy of cost accounts, 
and see that they really understand what they are doing. Every 
form should be accompanied with definite written instructions 
covering its origin, use, and disposition. Clerks must be 
thoroughly and patiently trained, and frequently checked to 
see that they are doing what they are supposed to do. 



I 



WHAT A GOOD COST SYSTEM 

MEANS TO YOU 

Do you realize that your cost system may mean the life 
or death of your business? 

Every receiver in bankruptcy can tell you stories about 
facts discovered in business autopsies, which were responsible 
for failures and which could have been discovered before it 
was too late through the aid of good cost systems. Every 
receivership, in other words, means that many a business could 
easily have been saved by accurate cost accounting. 

This was the case with a certain garment factory 
which made four lines of garments, including undermuslins, 
brassieres, night-robes and children's suits. Costs were not 
departmentalized. Styles changed, petticoats and slips became 
losing propositions, and profits began to dwindle. Frantic 
efforts were made to stimulate sales, but the campaign was 
unintelligent because it worked in the dark. The autopsy 
showed that the brassieres and children's goods were making 
money, while the other lines were losing heavily. An adequate 
cost' system would have brought these facts out in time to be 
useful. 

Another plant had its costs departmentalized, but under 
a method of distribution of general expense that loaded certain 
departments with much more than their just shares, and 
correspondingly relieved other departments of their just 
proportions of the burden. The result was entirely misleading, 



12 HOW TO FIND FACTORY COSTS 

for it showed high profits from certain lines, and heavy losses 
from others. The loss shown on one line was so heavy that 
the firm decided to discontinue it, although it was a good one 
for advertising purposes, and ought to have been a money- 
maker. When an analysis and correction of the cost system 
showed the source of the error, an apparently large loss turned 
out to be a small one, and the line was retained. There is 
every prospect that it will be quite profitable. 

A COST SYSTEM WOULD HAVE SAVED THIS COMPANY $32,000 
ON JUST ONE ITEM ALONE 

A company manufacturing electrical specialties got out 
one which it sold to the distributor for $100, to be retailed at 
$150. Four thousand of them were sold before an investiga- 
tion brought out the fact that it was costing $108 to make each 
of them. The $100 price had been set on a guess. That 
particular guess cost $32,000 before it was corrected by an 
accurate knowledge of costs. This loss would have paid several 
times over the cost of about the most elaborate cost system 
conceivable. 

These are facts. And yet there are people still left in 
business who balk at the expense of a cost system! 

A cost system is the most valuable bit of insurance a concern 
can have, for it is an insurance against expensive mistakes, and 
when properly designed and operated, the expense of this 
insurance is less in proportion to its benefits than that of any 
other kind. 

In these days of close margins and keen competition, you 
can not afford to be ignorant of facts as vital as those concern- 
ing your costs of doing business. Some one or more of your 
competitors — a beginner with a smaller business perhaps — is 
sure to know his costs; — and once he pits this knowledge 
against your guesses he is certain to win in the long run. 
Knowledge is power. The beginning of managerial wisdom 
is the knowledge of costs. 



THE IMPORTANCE OF COSTS 13 

The most evident reason for an accurate cost system is the 
necessity of covering more than the cost of the product in 
the selling price. 

To be sure, one may wait until the end of the year, and 
after taking into account the inventories at the beginning and 
end of that period, and the entire income and the expenditures, 
arrive at a conclusion as to whether or not a profit has been 
made. 

In the absence of a cost system, however, such a conclusion 
relates only to the business as a whole, and does not enable one 
to know whether any particular line of the product has been 
sold above or below cost. 

HERE IS ONE OF THE CHIEF BENEFITS USUALLY SECURED FROM 
A GOOD COST SYSTEM CORRECTLY HANDLED 

One of the first facts that a cost system usually shows the 
management, is the fact that if several lines are being manu- 
factured, certain of them are profitable and others less so, 
while some are being sold at cost and some at actual losses. 
The value of such knowledge as a guide to the development 
or suppression of each line is apparent. 

In order to estimate on new work, it is necessary to know 
the cost of each element that goes into it. That this knowledge 
is not general is evident from the very widely divergent 
estimates made on the same thing by different companies ; as, 
for instance, in the case of government work where estimates 
on the same battleship may vary by as much as one million or 
two million dollars. 

Such a marked variance is not due entirely to differences in 
the cost of labor and materials, and in the efficiency of the 
management: it is due rather to the fact that the bidders do 
not really know the cost of their work. This condition is not 
by any means confined to shipbuilding concerns. It is found 
in practically every type of industry, as may be verified by 
anyone at any time by simply submitting specifications to 
different concerns for estimates. 



14 HOW TO FIND FACTORY COSTS 

A leading foundryman in Pittsburgh once said to me: 
"I have offered to install cost systems for all of my local 
competitors. It costs me more now to try to meet their inac- 
curate estimates based on their inaccurate costs, than it would 
for me to hire cost experts for all of them." 

An accurate cost system faithfully reflects the changes, 
not only in the cost of materials and labor, but in the efficiency 
of operation and management from one period to another. It 
is therefore a valuable guide to the manager, directing him 
where and when to apply his particular attention to these 
details. This important use of cost accounting was pointed 
out by Babbage back in 1832. He says: 

"One of the first advantages which suggests itself as likely 
to arise from a correct analysis of the expense of the several 
processes of any manufacturer, is the indication which it would 
furnish of the course in which improvement should be directed. 
If a method could be contrived of diminishing by one-fourth 
the time required for fixing on the heads of pins, the expense 
of making them would be reduced about thirteen per cent; 
whilst a reduction of one-half the time employed in spinning 
the coil of wire out of which the heads are cut, would scarcely 
make any sensible difference in the cost of manufacturing of 
the whole article. It is therefore obvious that the attention 
would be much more advantageously directed to shortening the 
former than the latter process." 

HOW A COST SYSTEM HELPS YOU TO DECIDE WHETHER OR NOT 
CHANGES IN DESIGN OR METHOD ARE DESIRABLE 

This quality of reflecting the effect of changes is valuable 
in determining not only what alterations of method and 
materials should be made, but also in deciding the effect of 
changes in design, whether developed in the plant itself or 
suggested by customers. If the cost of such changes were 
more accurately known, manufacturing concerns more generally 
would be doing manufacturing instead of making or jobbing, 
and salesmen would not be so free in acceding to the frequently 



THE IMPORTANCE OF COSTS 15 

unjustified requests and demands of customers, while the 
profits which ought in theory to accrue from the business would 
more often become substantial realities. 

One of the most successful shoe concerns in New England 
is gradually succeeding in standardizing its product largely 
because it is able, with an accurate knowledge of its costs, to 
point out to buyers the expensiveness of even slight changes in 
design and material. 

It often happens, of course, that changes in the cost of 
material, labor and design are due to causes beyond the control 
of the management. In this case also it is highly important 
that the management should know exactly what the effect of 
these changes will be on the cost of the finished product, so that 
they may trim their sales or their prices accordingly. 

CUTTING DOWN ON LABOR AND EQUIPMENT THROUGH 
AN ACCURATE KNOWLEDGE OF COSTS 

This knowledge told one concern when to substitute dictat- 
ing machines for stenographers. It has led to substitutions 
of one material for another when primary costs have become 
disproportionate to the value of the product, and it has made 
clear the profitableness of even such slight changes in equip- 
ment as that which saved two inches of copper wire per coil in 
an electric specialty shop. 

One of the most important uses of a good cost system is the 
information it gives regarding the extent to which the resources 
of the producing end of the business are utilized by the sales 
end. That is, the proportion of time the equipment and build- 
ings are idle is an accurate index of the degree in which the 
manufacturing organization is fitted to market conditions. 
When business is dull, direct labor can be laid off and supplies 
of raw material may be reduced; but it is difficult and incon- 
venient to alter buildings and equipment to fit these fluctua- 
tions. When the cost accounting system is such as to show 
the cost of idle equipment and plant, it may be a most effective 
spur to the sales organization to increase sales or to the manage- 



16 HOW TO FIND FACTORY COSTS 

ment to dispose of its surplus equipment and plant if possible. 

E. A. Barker in Factory for November of 1915, called 
attention to a wide-spread practice in the use of costs: namely, 
an unwillingness to act on the real significance of the facts 
when those facts are unpleasant. 

He says: "Favoritism is the third weakness in the use of 
cost's. There is scarcely a manufacturer who has not found 
himself at one time or another making excuses or allowances 
for permitting a high cost on some favorite article or operation. 

HOW ACCURATE COSTS INFLUENCE THE PRODUCTION OF SEVERAL LINES 
OF ARTICLES, WITH RESPECT TO THEIR SALE AT A PROFIT 

"A manufacturer recently was shown that he was producing 
a certain article at a heavy loss. He refused to discontinue its 
manufacture because he had made his reputation and most of 
his money on it. Changing conditions, however, made a loss 
unavoidable. Yet he made all manner of excuses, apologies 
and allowances, until the loss in question seriously threatened 
the existence of his business. Then, and not until then, was 
the drag cut loose, and the business brought about and put on 
a paying basis. 

"Some managers dislike cost figures which do not support 
their preconceived views, but no purpose is served by ignoring 
positive cost returns. The part of wisdom lies in accepting 
the discouraging costs, and then setting about to remedy the 
conditions which are responsible. 

"Not long ago an engineer was talking with a manufacturer 
about costs. Though over two hundred different articles were 
made by this manufacturer, costs were obtained strictly on an 
average basis. The engineer pointed out that although the 
books showed a fair profit on the whole volume of business, 
undoubtedly some of the two hundred articles were being pro- 
duced at a loss. 

"The manufacturer replied that such might be the case. 
The engineer then asked him if it would not be a benefit from 



THE IMPORTANCE OF COSTS 17 

the control point of view to know the exact cost of the different 
lines. 

" 'If I did know,' was the answer, 'there would be certain 
lines I could not sell.' Surprised at this remark, the engineer 
asked for an explanation. 

" 'Every article I produce now I am selling at a profit. I 
would not sell goods below cost.' 

"This seems a strange process of reasoning. Yet, there 
are many who deliberately deceive themselves by similar logic, 
and seem to take pleasure in so doing." 



II 

WHAT ARE COST ACCOUNTS ? 



The chief distinction between financial accounting and cost 
accounting is that the former deals exclusively with the money 
and credit transactions of a business, while the latter deals with 
these same transactions, but with reference to the cost of 
products and operations. The unit of financial accounting isi 
the unit of money, whether the dollar, the pound or the franc, 
while the units of cost accounting are the units of money plus 
the units of operations, of sales, of product and of time. 

The fact that cost accounting includes some of the elements 
of financial accounting makes possible the interlocking of cost 
with financial accounts. This is indispensable for checking 
purposes, and without it a system of cost accounts may easily, 
and often does, go completely astray. 

The object of cost accounting is to charge each element 
or unit of product with its share of all the expense to which 
the business has been subject, inasmuch as there is no certainty 
of making a profit on the sale of the product unless all this 
expense is absorbed in it and covered by the selling price. 

The kinds of costs that a manager wants to get vary not 
only with the type of industry, but within each industry itself 
according to the purpose for which they are wanted. 

In a continuous or tonnage type of industry the aim usually 
is to ascertain the cost per unit of weight or length for each of 
the comparatively limited number of products, such as tons of 



"~! 




HOW THE WORK IS DIRECTED 

In this room the work of a part of the Pullman Company's plant— or it might be a 
small independent plant, of course— is mapped out. The two men are receiving 
instructions which are marked with a time stamp. The boards are arranged by 
machines, and provide for instructions covering three jobs,— the one in hand, 
the one next ahead, and even the second ahead 



20 



HOW TO FIND FACTORY COSTS 



COST OF MATERIAL 



COST OF 
DIRECT LABOR 



DEPARTMENTAL AND 
GENERAL EXPENSE 



SELLING EXPENSE 



PROFIT 



PRIME COST 



i 



FACTORY COST 



i 



TOTAL COST TO 
MAKE AND SELL 



i 



SELLING PRICE 



i 



DIAGRAM I 

Here is a graphic representation of the main components of the selling price and their relations 
to each other. On page 23 you will find a detailed explanation of this diagram. 



WHAT ARE COST ACCOUNTS? 21 

castings or yards or pounds of yarn or cloth. This result is 
attained by getting departmental costs on the product as it 
makes its way through each department, totaling these and 
adding to them the general administrative expenses to secure 
the entire factory cost. These costs are specific in so far as 
they relate to individual lines of product. 

HOW A PROPERLY ARRANGED COST SYSTEM ENABLES YOU 
QUICKLY TO GET TOTAL FACTORY COST 

The other type of industry, the assembling type, is not so 
much interested in general costs as it is in specific job costs 
and the cost of operations. To be sure, in some instances 
where the product is uniform, or consists of only a few lines 
of articles comparatively simple in their construction, it may 
be sufficient to get general costs in much the same way as in 
a tonnage industry. But, as a rule, in assembling plants the 
types of product are numerous and varied, and it is important 
to get the cost of each individual line and each operation on 
each line. The sum of the operation costs, added to the cost 
of materials, plus that proportion of the specific departmental 
costs and the general administrative expenses which should be 
apportioned to the unit of product under consideration, consti- 
tutes the total factory cost of such product. A properly con- 
trived cost system makes it possible to secure these costs in 
minute detail and to combine them quickly and accurately in 
whichever way is the most useful for the particular purpose 
in hand. 

There are types of industry in which it is advisable, either 
on account of uniformity of the product, or for the exactly 
opposite reason — the extreme diversity of the product — to take 
costs on typical items only. This is the case with a company 
manufacturing low-grade pottery, such as flower pots, and with 
another which makes machine specialties. 

One f act; that has retarded the extension of cost accounting 
is the unnecessary and the expensive refinement to which it is 
sometimes carried. There can be no objection on principle to 



%% HOW TO FIND FACTORY COSTS 

red tape when that tape is necessary to tie together the organi- 
zation; but sometimes there may be too much of it, more than 
is either necessary or useful. 

It must be clearly recognized from the start that any cost 
system involves a considerable element of judgment and can 
not therefore be as accurate as are engineering specifications 
which are based upon natural laws. There is bound to be an 
uncertain percentage of error in every cost estimate no matter 
how much care is taken to make it accurate. This being the 
case, it is a waste of valuable time and energy to attempt to 
make each detail of the estimate absolutely correct. The fact 
is that no amount of effort is going to eliminate inaccuracy 
from all the details, and unless all the inaccuracies are on the 
same side — plus or minus — they are pretty apt to offset each 
other, so that the net result will not be far from the truth. 

This principle is laid down, not as an excuse for the rough 
approximations that sometimes go by the name of "cost 
accounts," but as a warning against over-refinement. 



Ill 

WHAT GOES TO MAKE UP 
YOUR COSTS 

Costs are made up of combinations of units of time, such as 
the hour, day, week, month or year; of product, such as the 
yard, ton, piece, machine or job; of production, such as the 
operator or the operation; and of money. In many cases, 
several of these combinations of units are used at once, as when 
the daily costs are accumulated in weekly or monthly sum- 
maries. 

It is not uncommon in textile plants to get costs both by the 
ton and by the job. Sometimes one unit may be used in 
certain departments of a plant while other units are the bases 
of costs in other departments of the same plant. For example, 
costs may be had by operators in departments where hand- work 
predominates and by operations where work is mainly by 
machine. The one universal and invariable element is money, 
and as money is the unit also of the commercial accounts, it is 
the money statement of costs which makes possible the inter- 
locking with commercial accounts which is necessary as a check 
on the accuracy of the costs. 

It is customary to divide total cost into two main elements : 
factory cost and selling cost, which, taken together, and with 
the profit added, constitute the selling price. ( See Diagram I.) 
Factory costs again are usually divided into prime costs and 
indirect expense. The latter includes all the expenses of 
administration and supervision. It is also variously known as 



24 HOW TO FIND FACTORY COSTS 

"overhead," "burden," and "non-productive" expense, and 
comprises all expenditure for labor and materials which does 
not enter directly into, nor is sold with, the product. This 
expense is further subdivided, in some cases, into departmental 
expense: that is, all indirect expense which may be charged 
directly to a department, and administrative expense, which 
includes all other indirect factory expense. 

Administrative expense is still further analyzed into 
auxiliary expense, which includes all indirect expenditures 
actually necessary to the running of the plant, such as those for 
power, stock-rooms, and the like, and administrative expense 
proper, which covers those departments necessary for the 
handling of the business, but in the absence of which the factory, 
as such, nevertheless could be run physically. To this latter 
class belong the expenses for accounting and legal depart- 
ments. The line between these is sometimes difficult to draw, 
and in any case this is a refinement which often may be unnec- 
essary, (See Diagrams II and III on pages 26 and 28). 

DISTINGUISHING BETWEEN "PRODUCTIVE," "NON-PRODUCTIVE," 
AND "SUPERFLUOUS" COSTS 

Just a word as to the use of the term "non-productive." Any 
expenditure for labor or material is either necessary for the 
efficient management of the plant and the making of the 
product, or it is entirely superfluous and should be eliminated. 
If the expenditure is necessary it must be in some sense pro- 
ductive. 

This is fairly obvious even to those who insist on using the 
terms "non-productive" and "non-producer.' ' Nevertheless 
those terms seem to carry some kind of stigma, involved in the 
suggestion that there is necessarily something wasteful about 
"non-productive" expenditures. There follows a tendency to 
reduce "non-productive^ expense to a minimum which is really 
inconsistent with the proper management of a plant. 

A favorite method of doing this is to have most of the alleged 
non-productive work performed by so-called "productive" 



DIRECT COSTS U 

labor, as when an operator is required to do his own planning, 
get his own materials, and the like, thus charging this work 
to "productive" accounts and incidentally losing all possibility 
of controlling it. When this type of necessary activity is called 
"indirect" rather than "non-productive," there is not the same 
implication of wasteful and unnecessary expenditure. There 
is no longer the same objection to bringing it out into the open, 
charging it properly, and organizing it for the most effective 
control. 

Direct costs are chargeable easily and immediately to the 
product, while indirect costs, which must be included in one way 
or another, have to be added by some method of distribution. 
It is perfectly evident what materials and what labor go 
directly into the product. Hence the securing of direct costs 
is easy and common. 

Most of the simple cost systems, one-form systems and one- 
man systems, so dear to popular business literature, deal exclu- 
sively with this necessary but obvious detail. In view of the 
fact, however, that indirect costs may amount in some instances 
to as much as two or three hundred per cent of direct costs, 
failure to take them into consideration may lead speedily into 
bankruptcy. 

NEGLECT OP THE "INDIRECT COST" MADE A DD7FERENCE OF 30% 
IN THIS BUSINESS MAN'S OVERHEAD 

Recently an automobile agent assured me that he was losing 
money in his "service-station," and, although he had a cost 
system, he could not locate the leak. A series of questions soon 
brought out the fact that the 80% he was charging for over- 
head had omitted such items as rent, interest on stock carried, 
work done under guarantee without charge, work done for the 
sales department, and idle time. When these items were 
included, the percentage to be added to direct labor on account 
of overhead turned out to be 110% and on this basis seventy- 
five cents an hour would just barely pay expenses if his men 
were occupied all the time. 



HOW TO FIND FACTORY COSTS 















LABOR 


-^__ 










MATERIALS 


— -— """"" ^^~--— ^ 












DIRECT EXPENSE 






ADMINISTRATION 












SUPERVISION 












RENT 
















HEAT 












LIGHT 












POWER 












WASTE 




REPAIRS 














DEPRECIATION 




. INDIRECT 
FACTORY EXPENSE 












SUPPLIES 














TOOLS 


















INSURANCE 












TAXES 












TRANSPORTATION 












EXPERIMENTS 












ROYALTIES 












LEGAL ADVICE 












RECLAMATION OF 
ERRORS 












WELFARE AND SAFETY 












SALARIES 


-^ 










COMMISSIONS 


^^^\^ 


TRAVELING EXPENSES 










ADVERTISING 


" "~~——— — ~~ — ^^-^r^^"^-^ 






■ > ' ~ -— — — jr^~~-~^" 


SOLING EXPENSE 












' ESTIMATES 










SKETCHES 


. — — ■ ~~ ____ — ~~^^5^ 








DEMONSTRATIONS 












EXPERIMENTS 












SCHOOLS 















DIAGRAM II 

This is a graphic analysis of the main constituents of direct expense, indirect factory expense 
and selling expense. This diagram should be considered in connection with Diagrams I and III, 



DIRECT COSTS 37 

To find out what these indirect costs are, and to get them 
into the selling price of the product, through which they must 
sooner or later be recovered, and to do this accurately and with 
justice to the various items of the product concerned, is no 
simple or easy matter, while at the same time it is just as neces- 
sary as the ascertainment of direct costs. Simplicity is a rela- 
tive virtue only. What is appropriately simple for a child is 
puerile for a man. With an increasing complexity of condi- 
tions there must go a corresponding complexity of system. A 
cost system should be as simple as is consistent with effective- 
ness. 

HOW KNOWLEDGE OF TOTAL COST HELPS TO FIX THE 
SELLING PRICE AT A PROFIT 

The components of total cost, then, are direct expense, 
including labor and materials; indirect factory expense, includ- 
ing cost of administration, supervision, rent, heat, light, power, 
waste, repairs, depreciation* supplies, tools, insurance, taxes, 
transportation, experiments, royalties, legal advice and rec- 
lamation of errors; and, finally, selling cost, including salaries 
commissions, traveling expenses, and the cost' of advertising, 
estimates, sketches, demonstrations, experiments and "schools." 
When the proper share of indirect factory cost and selling cost 
is added to the direct labor and material cost of the product, 
and the margin of profit added to these, we have the selling 
price. 

Methods of finding direct labor and material costs will be 
discussed in this chapter, while methods of finding and dis- 
tributing indirect costs will be developed in succeeding chapters. 

There are two ways of finding direct labor costs, depending 
on the nature of the product. With a tonnage product, the 
total of the units produced in a given time, say a day, week or 
month, is divided into the total of the labor cost of the work- 
men actually engaged on that product during the given period. 
This gives a direct labor cost per ton or per pound. 



28 



HOW TO FIND FACTORY COSTS 



PRODUCTION 
EXPENSE 



CHARGES 



FACTORY 
EXPENSE 



ADMINISTRATION 

AND SELLING 

EXPENSE 



MATERIAL ft 



BOOK COST 



FACTORY COST 




ACTUAL 
COST 



DIAGRAM III 

This diagram pictures another classification of factory costs and will prove most helpful when 
used in connection with Diagrams I and II and the detailed explanation on page 2k> 



DIRECT COSTS 29 

The time spent by the workmen is ascertained from their 
daily time cards (Form 1) ; and the statements of the work- 
men or foremen, or of both, to the effect that their time was 
spent on the work under consideration, are accepted. In 
some cases the time card alone is used, for it is assumed that 
if the men were in the plant as shown by the cards, they could 
only have been engaged on the lot or order known to be under 
way in their departments. 

THE RESULT OF CARELESSNESS IN CHECKING JOB CARDS AND HOW IT 
AFFECTS THE INDIRECT LABOR COST 

In the types of industry where it is desired to get more 
specific costs on parts or units of products, it is customary to 
use the daily time card showing the number of hours the work- 
men were present in the plant, and usually to supplement this 
by a daily job card on which the operator notes the number of 
jobs that have passed through his hands during the day and 
the time he has spent on each (Forms 2, 3 and 4) . This record, 
usually O. K'd. by the foreman, is turned in to the factory office 
at the end of the day, or at the completion of the job, if more 
than one day is required for the work, and posted in the cost 
department to the summary sheet, which, as explained later, 
summarizes the direct cost and the portion of indirect expense 
chargeable to each job. 

While these methods are fairly effective, they are as a rule 
quite inaccurate, especially where there are a large number of 
jobs going through each operator's hands in the course of a 
day; but, what is more important, they usually fail entirely to 
account for that portion of the operator's time which is occu- 
pied with indirect labor or which is genuinely non-productive — 
that is, idle. 

The operator who sits down at the end of the day, or even 
at the end of the morning, and attempts to fill out his job card 
with the number of orders and the time spent on each, is usually 
more intent on showing he was working on something every 
minute while he was in the plant, than in figuring the number 



HOW TO FIND FACTORY COSTS 



JOB CARD 

m. order mi 


ALLOWED 




WAGES 


TAKEN 




AT 

BONUS 

TOTAL 








PREMIUM 
TOTAL HOURS 














OAY 


IN 


OUT 


IN 


OUT 


TOTAL 


F 


A.M. 












P.M. 












S 


A.M. 












P.M. 












Sun. 


A.M. 












P.M. 












M 


A.M. 












P.M. 












T 


A.M. 












P.M. 












W 


A.M. 












P.M. 












T 


A.M. 












P.M. 












NAME. 


WEEKE 


NDINB 


EfflBU 


N 











Card Do. 






HELMAN, SIMPSON and Company 

foreman's Report of 

Oay Work 

Dona fay 


Workman's So. Date 


Commenced Work Quit Work 


lob No. 


NO. of 
Hrs. 


Article 


No. of 
Operation 




























































Total 






Foreman 


Dept No. 



FORM 1 

This is a typical job card for use in connection 

with ordinary day or premium work. 



FORM 2 

The foreman makes up this type of day-work 

card for keeping track of productive labor. 



MAN'S No. 




























1916 


NAME 




DEPT. No. 


PART No. 


QUANTITY 


OPERATION 


PIECEWORK 


DAY WORK TIME 


INSPECTION LOSS 


HRS. 


MIN. 


RATE 
PER 
100 


AML 


HRS. 


MIN. 


HOUR 

RATE 


AMT. 


COST 
PER 100 


QUANTITY 


CAUSE 







































































































































































































































































































































FORM 3 

Here is a type of work card which is made up by the workman and approved by the foreman. It 

covers both piece and day work, and provides for dementing the operator with defective work. 



DIRECT COSTS 31 

of minutes taken on each job. The foreman's O. K. is gener- 
ally nothing more than a formality. 

"If work in a factory begins at half past seven, but the 
workman does not start his machine on a piece until seven forty, 
that job goes down just the same as beginning at half past 
seven. If the worker knocks off at eleven fifty, the job is charged 
up to twelve o'clock. If the machine breaks down in the course 
of the morning and is out of commission for half an hour, that 
time is charged to the job, just the same. If jobs are changed 
during the morning and twenty minutes delay is occasioned 
by not having materials or tools at hand immediately the 
finished job is taken off the machine, that idle time is sure to 
be charged to one or the other jobs." 

This is what a foreman told me in explanation of his refusal 
to accept the job cards as indications of the time it really had 
taken to perform the work as detailed on them. 

MAKING SURE THAT JOB CARDS INDICATE THE TIME ACTUALLY REQUIRED 
TO PERFORM THE WORK 

For industries where it is important to know the exact cost, 
and especially for those which are so organized that they can 
take advantage of a real knowledge of the time occupied in 
actual production and that expended in indirect labor, whether 
productive or non-productive, it is advisable to use an individual 
job card for each job, order or lot (Forms 5 and 6) . This card 
is changed each time a workman changes his job; except that in 
special cases where the operator works only a few minutes on 
each job, numbers of them may be grouped together and 
changed periodically. 

This card contains, among other facts, the job number and 
the workman's name. It is stamped with the times the worker 
begins and ends his job. If there is serious interruption, the 
job card is taken up and a new one issued to cover the inter- 
ruption. 

The last card is again taken up when the job is resumed, 
while on the job card, or a duplicate, is carried the time actually 



HOW TO FIND FACTORY COSTS 





SHOP WORK 








ITEMIZE ALL ENTRIES 




NO. HOURS 


WORK 


BEGAN 


QUIT 




UNLOADING MATERIAL 








SWEEPING AND OILING 








HANDLING STOCK 








RUNNING ERRANDS 








CORRECTING MISTAKES 





























































































i, « 


l» 


OUT 


HJJ 


OUT 


flVERBMEjPERMH 




0ATC *p?Tn 


1916 


?CHFftKM<v-6600 








1 


y urn«i80B 






. 


Foreman,- 


: 




>- OVERTIME All, 0WFD . ** HOURS 




I 



FORM 4 
This card is used with Forms 2 and 3 to keep 
track of time consumed by non-productive work. 



FORM 7 
This card shows in advance the amount of over- 
time allowed, and is signed by the foreman. 



IN 

OUT 










1 






S 




DEPARTMENT D M 


IF JOB IS NOT FINISHED 
SCRATCH OUT THIS «T 


F 




CHARGE SYMBOL 


n»v um 


IF JOB IS FINISHED 
SCRATCH OUT THIS SV 


NF 




P 




OPERATION 


NO. OF 
PIECES 
FINISHED 


MAN'S 
TIME 


MACHINE 
TIME 




u 


MACHINE 
NO. 


NT M 


IF JOB IS NOT FINISHED 
SCRATCH OUT THIS W 


F 




IF JOB IS FINISHED 
SCRATCH OUT THIS UT 


NF 
























OPERATION 


NO. OF 
PIECES 
FINISHED 


MAN'S 
TIME 


MACHINE 
TIME 


MACHINE 
NO 
































WORKMAN'S NAME MAN'S NO. 

DM 






















1 HAVE CHECKED THESE ENTRIES H 
SI 


D BELIEVE THEM TO BE CORRECT: 
,ned by Foreman or His Representative 












ROUTE 
SHEETS 


PAY 

SHEET 


COST SHEET 




WORKMAN'S NAME MAN'S NO. 

DM 


MAN'S 


MACHINE 










OAY WORK ;' M T E E 


CHECKED THESE ENTRIES AND BELIEVE THEM TO BE CORRECT: 
Signed by Foreman or His Representative 




ROUTE 
SHEETS 


BONUS 

RECORD 


PAY 

SHEET 


COST SHEET 






MAN'S 


MACHINE 
















r 


PUNU 


> vvuifr 


[ NOTE 



FORMS 5 AND 6 

The planning department issues these job cards for day work and piece work. The job number is 
entered opposite "C;" the time issued is stamped after "In," and the time completed after "Out." 



DIRECT COSTS S3 

taken on the work in hand. This gives an accurate record, not 
only of the work done, but of the losses of time from delays, 
whether necessary or unnecessary. As such, it is the basis of 
accurate labor costs, besides serving several other purposes in 
the administration of the work which are beyond the scope of 
this discussion. 

Not the least among the advantages of this card is the fact 
that it eliminates the costly time card system used to show the 
time the workman enters and leaves the plant. The job cards 
are made out the day before, or overnight, for each workman 
and are stamped with the opening time in the morning. These 
cards are placed in racks under the workman's number. 

The racks are opened so that each man gets his card as he 
enters, showing the job on which he is to begin and the time he 
entered. At opening time, say at seventy thirty, the racks 
are closed and all cards not yet taken out by workmen are sent 
to some part of the factory office, to which all late workmen 
have to go to get a card on which to do their work and draw 
their pay. This card emphasizes their lateness, and being 
stamped with the time they actually begin, allows for appro- 
priate deductions on account of tardiness. 

ONE MANAGER, USING THIS SIMPLE DEVICE, PREVENTED WORKMEN FROM 
TURNING IN EXCESS OVERTIME 

Accounting for overtime presents no great difficulty, as it is 
usually taken care of by spaces on the job cards, or separate 
overtime cards, and by additional spaces on the payroll sheets. 
Every manager knows, however, the great temptation that 
workmen are under to get as much overtime, at straight rates 
or "time-and-a-half," as they can squeeze in, and how easily 
foremen become careless about checking this tendency. The 
"overtime permit" (Form 7) shown on page 32 provides a 
means of control at the same time that it gives a record of the 
overtime actually put in. It must be signed by the foreman, 
and indicate in advance the number of hours of overtime to be 
allowed. By looking over these cards fairly often the super- 



S4 



HOW TO FIND FACTORY COSTS 




ORDERS FOR PATTERNS 



ORDERS FOR CASTINGS 



DUPLICATE TO OFFICE 

REQUISITION ON 
PURCHASING DEPT FOR 
MATERIAL BOUGHT OUTSIDE 

COMPLETE LIST OF 
ALL PARTS TO SHOP 



SHOP ORDERS 
PERTAINING TO 
PLANT REPAIRS, 
BETTERMENT. 
AND GENERAL 
SHOP EXPENSE 



NON-PRODUCTIVE 



"PINK" ORDERS COVERING ITEMS OF CONSIDERABLE COST 
SHOP CRANES AND THE LIKE 



"BLUE" ORDERS TOOL ROOM 
COVERING ITEMS FOR EXPENSIVE 
REPAIRS TO SHOP TOOLS 



"BROWN" ORDERS CARPENTER SHOP 
COVERING ITEMS FOR EXPENSIVE- REPAIRS 
TO BUILDINGS, ALSO NEW BUILDINGS, 
ADDITIONS, ETC. 



EXPENSE 



SMALL ITEMS, REPAIRS, 
EXPENSE. BETTERMENT, 
ETC, PER FIXED ORDER 
NUMBER SMALL BOOK 




SHOP 



NOS. 1801 TO 
1813 INCLUSIVE 



REPAIRS 



NOS. 1820 TO 
1828 INCLUSIVE 



BETTERMENT 



NOS. 1840 TO 
1849 INCLUSIVE 



DIAGRAM IV 

This is a diagrammatic analysis of one company's order system. In conjunction with a rule book 
for charging time, it supplies this concern's key to the recording and figuring of all its costs. 



DIRECT COSTS 35 

intendent or manager can keep close track of the overtime, 
and quickly stop any tendency toward abuse. 

It is usually advisable to chart the course followed by job 
cards and orders so that all clerks handling them may know 
exactly what they have to do, where the cards and orders come 
from and where they have to go. These charts are as useful 
for office work as routing diagrams are for showing the course 
of the product through the factory. Diagrams IV, V and VI 
show how orders, job cards and material are routed through 
one plant. With such a chart and instructions it' is harder for 
a clerk to make a mistake than it is to do the job right. 

WHY IT IS OF GREAT IMPORTANCE TO MAKE SURE THAT EVEN THE SMALLEST 
ITEMS ARE REPRESENTED IN YOUR FINAL COST FIGURES 

For some curious reason, accuracy in accounting for 
materials is not generally considered as important as in account- 
ing for direct labor. Every manager likes to feel that every 
minute of the labor that he buys is accounted for on some order, 
but it does not seem to worry him if two or three per cent, or 
more, of his materials is unaccounted for, or if even a larger 
portion is charged wrongly. Why this should be so, when 
materials cost real money just like labor, is one of the puzzles 
of current managerial practice. 

Perhaps one explanation lies in the fact that so few con- 
cerns have adequate facilities for the proper storage and 
handling of materials. Money must come in and be stored in 
definite places in the safe or the petty cash drawer, and the same 
is true of stamps, probably because they have the price marked 
on them and may pass for money. 

Yet raw materials, whether intended to go into the product 
or into supplies, and partly finished stock waiting for assemb- 
ling, may be, and frequently are, dumped anywhere according 
to the convenience of the foremen or the truckmen, are issued 
to, or taken by, anybody who may be presumed to have a use 
for them, and accounted for or not, according as to whether or 
not anybody has the time or willingness to make the proper 



56 



HOW TO FIND FACTORY COSTS 



CHARGEABLE IN DETAIL TO 



OBTAINED FROM 




■ PART NUMBER- 



NEW YORK ORDER NUMBER 
YELLOW ORDER NUMBER 
ENGINE NUMBER 
HOIST NUMBER 
BOILER NUMBER 
HEATER NUMBER 



STANDING SHOP ORDER NO. 1601 

TO 1819 INCLUSIVE 

DEPARTMENT ORDER NO. PINK, 

BROWN, BLUE 



STANDING SHOP CROER NO. 1820 
TO 1839 INCLUSIVE 



DEPARTMENT ORDER NO. PINK. 
BROWN, BLUE 



STANDING SHOP ORDER NO. 1840 
TO 1850 INCLUSIVE 

CEPARTMENT ORDER NO. PINK. 
BROWN. BLUE 

INVENTORY MEMORANDA BOOK _ 
(PURCHASING CLERK* 



FOUNDRY WEIGHTS 
SMITH SHOP CHARGES 
CARPENTER SHOP CHARGES 
BILLS FOR CASTINGS 
AND SUPPLIES 



FOUNORY WEIGHTS 
SMITH SHOP CHARGES 
CARPENTER SHOP CHARGES 
PATTERN SHOP CHARGES 
PIPE FITTERS' CHARGES 
STORE ROOM CHARGES 
TOOL ROOM CHARGES 
BOILER SHOP CHARGES 
ERECTING SHOP CHARGES 
SHAFT WEIGHTS 
BILLS 

MATERIAL PER 
STANDARD LISTS 
MATERIAL PER DRAWING 
ROOM MEMORANDA 
BOLTS. NUTS. WASHERS 

AND SUNDRIES 
NOT OTHERWISE CHARGEABLE 



MACHINE TOOLS; SPECIAL 
APPLIANCES; FIXTURES;.NEW 
BUILDINGS, AND IN GENERAL 
ALL MATERIAL BOUGHT OUT- 
RIGHT NOT TO BE CHANGED 
OR DIVIDED OR TO HAVE 
LABOR EXPENDED ON, AND 
WHICH WILL APPEAR ON IN* 
VENTORY BOOKS AS A DIS- 
TINCT ASSET 



STANDING SHOP ORDER NO. 1801 I 

TO 1839 INCLUSIVE 

DEPARTMENT ORDER NO. PINK. 
BROWN. BLUE 



STEAM COAL; SMITN SHOP COAL; FEED OIL; 
GAS; WATER; WASTE; FILES; SMALL TOOLS; BELTS; 
GLUE; OFFICE SUPPLIES; PAINT; FERRY AGE; FREIGHT 
AND EXPRESSAGE; TRUCKAGE; BILLS FOR REPAIRS 
ANO EXPENSES; FOUNDRY SUPPLIES; SUNDRIES 



DIAGRAM V 

Here is a graphic representation of one plan for subdividing labor charges throughout a plant, 
A diagram of this type may prove very helpful when figuring your own costs. 



DIRECT COSTS 37 

records. Under these conditions it is obviously impossible ac- 
curately to keep track of all the materials handled. 

The first requisite in accounting for materials is some form 
of stores system by which all materials are kept definitely in 
charge of responsible storekeepers and are issued only on 
written orders specifying the lot or job on which they are to 
be used (Forms 8 and 9). Some kind of a perpetual inven- 
tory by means of which a record is constantly kept showing the 
receipt and disbursement of materials, is a necessity for other 
purposes than those discussed in this book and is a useful 
adjunct to cost-keeping. 

THE USE OF THIS PERPETUAL INVENTORY ELIMINATES ANY CHANCE 
OF MATERIAL BEING MISSED 

This perpetual inventory may vary in detail and complete- 
ness all the way from a simple card or sheet showing amounts 
received and amounts issued, with balances and dates (Form 
10) to the elaborate balance sheets used in the most advanced 
forms of management, which show the amounts ordered on 
single orders and accumulated orders, requisition numbers, 
purchase order numbers with dates and prices: quantities re- 
ceived, with dates; quantities issued, with dates and order 
numbers on which issued ; prices per unit and per issue ; quan- 
tities reserved for orders to be executed in the future, together 
with dates of reservations and of issue, and order numbers; 
quantities available for reservation, which is the difference 
between quantities on hand, plus those on order, and amounts 
reserved; and, finally, the total quantity of material required 
for the execution of all orders on hand, from which is deducted 
the quantity purchased on each separate order, leaving the 
amount still to be bought (Form 11). 

All materials should be issued on written requisitions show- 
ing the order number for which issued, date, quantity, and the 
price of the issue, this price including freight and expense, as 
well as purchase prices (Form 9) . These prices can be taken 
from a perpetual inventory sheet which takes them from pur- 



88 HOW TO FIND FACTORY COSTS 

chase orders and freight and express vouchers, or, if it is not 
desired to have this information available to perpetual inven- 
tory clerks, they should be at hand in the cost department where 
they will be entered on each requisition after the materials have 
actually been issued. From these requisitions the prices are 
posted to cost summary sheets for each job in the same way as 
direct labor. 

An important detail in this connection is the proper 
handling of credit's to a production order. It frequently hap- 
pens that more materials are issued to an order than are required 
by it. The surplus is either returned to stock or used on 
another order: in either case, the order originally charged with 
the material should be duly credited with that which is not used 
and the storeroom or the other order debited. 

HOW MATERIAL FORMERLY WASTED IS 
ACCOUNTED FOR 

In many industries, the wastage of material incidental to 
manufacturing operations is so considerable as to demand spe- 
cial attention. If the waste can not be sold or otherwise 
reclaimed, it is not necessary to make a special charge for it, as 
it is already accounted for in the requisition charged to the 
order. If it can be reclaimed, however, it should be treated as 
a new product, credited to the order, and debited to the store- 
room to which, when disposed of, it will be credited (Form 
12). 

The total of all charges for materials used, together with 
the inventory of materials on hand, should balance with the 
ledger accounts of stores purchased. This ideal condition is, 
at the best, hard to attain. In the absence of a well-kept per- 
petual inventory, however, it is practically impossible. Owing 
to the careless handling most materials receive and the inac- 
curacy of perpetual inventory clerks, it is absolutely necessary 
that the inventory be frequently checked and the amounts 
shown to be on hand by the books made to square with the 
amounts shown to be on hand by actual count. 



DIRECT COSTS 39 

It is not desirable to make this comparison once a year only, 
at the time of the traditional annual inventory. Annual in- 
ventories are notoriously inaccurate, as well as exceedingly 
expensive in labor cost and the wastage of valuable productive 
time. A perpetual inventory should be checked by frequent 
physical counts of parts of the materials on hand. (Form 13.) 
If the entire stock is divided into twenty-six lots, and one of 
these lot's is checked each day, the entire stock will be checked 
and covered once a month. 

This is but one of the numerous checks which may and 
should be used. Suffice it to say that it is just as important, 
both from the financial and the manufacturing points of view 
to keep accurate inventories of materials in stock, as it is to 
account accurately for the money which passes through a 
concern, 



IV 

HOW TO HANDLE 
INDIRECT COSTS 



Direct or prime costs having been ascertained as suggested 
in the preceding chapter, it is necessary to add indirect costs, 
including all the expenses of administration, supervision and 
operation which are necessary for manufacturing the product, 
in order to determine the total factory cost. Indirect expenses 
include such items as salaries of executives, superintendents, 
foremen, storekeepers, inspectors, janitors, and the like; the 
cost of heat, light, power, repairs, supplies, and the like, and 
such fixed charges as rent, depreciation, and perhaps interest. 
When to these is added selling expense, we have the total cost 
to which profits are added to make the selling price. 

Depreciation, interest, and selling expense will be discussed 
in the following chapters ; the other indirect expenses, in this. 

While a few plants still figure their expenses on a yearly 
basis, it is becoming more and more the practice to make them 
up monthly, or by four-weekly periods, and even, in a few 
instances, weekly. Of these methods the monthly or the four- 
weekly periods are usually the best, as they not only make 
it possible to keep better posted on the exact condition of the 
business, but, what is more important, they enable the manage- 
ment to take immediate steps to remedy disadvantageous con- 
ditions within a short time after they are discovered. It does 
not do much good to learn in March of this year that power 
costs were excessively high in March of last year ; whereas, if 



INDIRECT COSTS 41 

the fact had been known in April of last year, remedial steps 
could have been taken immediately. 

One big machine shop was getting its scrap and spoiled 
material reports at irregular intervals, usually from four weeks 
to ten weeks after the damage had been done. When daily 
reports were substituted, it became possible for the first time 
to trace to their sources the causes of the unusual amount of 
waste in this plant. The carelessness of the workmen and fore- 
men and the deficiency of equipment and machines also could 
be brought home immediately and remedied. 

The advantage of a four-weekly period over a monthly 
period lies in the fact that the periods are all of equal length, 
thus making exact comparisons possible. In some plants each 
three months may be divided into two periods of four weeks, 
and one of five weeks, in order to avoid the inconvenience of 
splitting a weekly payroll at the end of calendar months. 

The truth is, that if costs are accurately kept it makes not 
much difference in most cases which of these methods is used, 
and it will be assumed in this discussion, for the sake of sim- 
plicity, that the calendar month is the unit. 

HERE IS A CLEAR EXPLANATION OF HOW ADMINISTRATIVE 
EXPENSE IS DISTRIBUTED 

The costs of administration include the salaries of executive 
officers, such as the general manager, superintendent, office- 
manager, foremen, bookkeepers, clerks and planning-depart- 
ment officials, and are taken directly from salary vouchers and 
the payroll. It sometimes happens that the time of the chief 
executive officers, such as the president, the treasurer, and occa- 
sionally the general manager, is divided between manufactur- 
ing and sales or financing. In this case the proportion of the 
time of these officers chargeable to manufacturing should be 
estimated with a reasonable degree of accuracy and only that 
time charged to factory expense. 

There may be certain administrative expenses, such as those 
for taxes, insurance, and legal advice, which are covered by 



42 



HOW TO FIND FACTORY COSTS 




( LABOR V 




BLACKSMITHS 



BLACKSMITH HELPERS 



BOILER MAKERS 



SHEET IRON WORKERS 



imi to 



PIPE FITTERS 



PATTERN MAKERS 



CARPENTERS 



N. Y. OFFICE 
ORDER NO. 



esgine no. 



ELECT. HOIST NO./ 



BOILER NO. 



YELLOW 
ORDER NO. 



} 



TIME CHARGED AS NOTED 
ON DRAWING OR SKETCH 



TIME CHARGED TO PART NO. 
ORDER NO.AS INDICATED BY 
RED AND WHITE COUPON 
TICKET 



ANY OF SKILLED MECHANICS 
AS A30VE LISTED WHEN ENGAGEO ON 
REPAIRS, RENEWALS OR BETTERMENT, 
CHARGE TIME TO 



t-l 7 ' 
u 

Us 



PINK, BROWN, BLUE 
ORDER NUMBERS 



OR 



ELECTRICIANS 



STANDING NUMBER 



TIME MAY BE CHARGED TO BETTERMENT AS 
INDICATED BY STANDING NUMBER CN OCCASIONS 



■JWHEN ENGAGED ON NEW WORK| 
WHICH ADDS VALUE TO PLANT 



HAMMER MEN 



CRANE MEN 



SWEEPERS 



LABORERS 



ENGINEERS & FIREMEN 



TIME CHARGED AGAINST EXPENSE SUBDIVIDED 
INTO VARIOUS ITEMS AS INDICATED BY STANDING 
NUMBER AS SHOWN IN'RULES FOR CHARGING TIME" 



PACKING AND BCXING 



SHIPPING 



SUPERINTENDENCE 



-TIME CHARGES DIRECT FROM PAYROLL TO EXPENSE 



DIAGRAM VI 

This diagram shows a typical division of material under various classes that designate the use 
which it is finally put. The sources from which the charges issue are also indicated. 



INDIRECT COSTS 43 

yearly charges, in which case the expense should be prorated 
equally over each month. There also may be an expense for 
expert services varying in amount at different times during 
the year. Unless such services are to be considered as a capital 
investment, their probable yearly amount should be estimated 
and prorated, any necessary adjustment to be made at the end 
of the year, either by charging it to profit and loss, or by adding 
it to the following year's estimate. 

Supplies used by administrative departments should be 
issued to them on requisitions exactly as materials are issued in 
the factory. The requisitions should show the department to 
which the supplies are charged, and their total for the month 
constitutes the monthly charge against the department. 

Every department should be charged with a share of the 
rent proportionate to the number of square feet of space occu- 
pied by the department. This is true whether a concern owns 
its own plant or rents it. 

THE BEST WAY TO HANDLE THE RENT ITEM WITHOUT 
CHARGING IT TO PROFIT AND LOSS 

While a good argument might be made for charging rent, 
when it is paid to an outsider, to profit and loss, on the ground 
that the owner of the land and building is to that extent a 
partner in the enterprise, it is recommended that the current 
practice be followed, which is that rent be considered an element 
in the cost of production. If it is so considered, it is just as 
much an item of cost when the concern owns its own plant as 
when it rents it from another. Care must be taken, however, 
when rent is charged for a plant owned by the concern, that 
there are no duplicate charges for interest on the investment in 
land and buildings, and for depreciation, both of which are 
already included in the rent charge. 

The question is sometimes raised whether all departments, 
direct manufacturing and indirect, should be charged with rent, 
or whether the entire rent charge should be distributed over the 
direct manufacturing departments only. The argument is 



44 



HOW TO FIND FACTORY COSTS 



*Tor.K rmnFR no 




REQUISITION FOR MATERIAL 






Data 


On Stock Order No. 


Dept. 


Dat 
Storekee 


e 




Tprrfake' Part No. 


ner deliver to nent. 






COST. 


To make 


Part No 




Total Lahpr 


RECORD OF MATERIAL 


Material 


Quantity 


Description 


Rate 


Amount 


Total 










































~~ ^- . :, J 


-^ 


..— - 


*-«* 




















Completed 


rpngyfr-rinfr.--. -f 


Filled 

, Storekeeper 


Received 

Foreman 



FORM 8 

No material is given out from the storeroom except upon the presentation of this order, which 
made out by the factory superintendent, and specifies on what job the material is to be used. 



































Date_, 


FOREMAN'S NOTIFICATION 






CHARGE TO ORDER NO. 
STORES TAG NO. 

S C 


■ ISSUED FOR 


- 


, Order No. 


QUANTITY 


UNIT .* 


A NUMBER 
1 PIECES 






TOTAL WEIGHT 


UNIT PRICE 


TOTAl VALUE 


DRAWING 
NO. 




Part No. 








MACHIN 
1 H °- 














ISSUE 
WRITTEN 


MONTH 


OAY 


VEAR 






19 




STORES ISSUE 

STOREKEEPER DO NOT Fill OUT 


STORES 
DELIVERED 






19 




Y ERS ON STORE- 




From 

To 




Oept. 
Dept. 














PLEASE ISSUE ABOVE ■ 


TO BEARER 










APPOR- 
TIONED 


ENTERED 


STORES DESCRIBED ABOVE HAVE BEEN ISSUED 


From this Notification the Foreman will make out the 
Workmen's Notification Card's 


TAG 


STORES 
ACCT. 


BALANCE 
ACCT. 


COST 
ACCT 












SIGNED BY STOREKEEP 


ER 









FORM 8A FORM 9 

When the order for material is made out, the Here is another form of requisition made out 
superintendent notifies the proper foreman. in the planning department 



INDIRECT COSTS 



45 























MINIMUM STOCK 






HMttMtltt STOCK 


ORDERED 


■'•"■■■' - " - 

RECEIVED 


DELIVERED 


DELIVERED 


DATE 


QUANTITY 


DATE 


QUANTITY 


OATE 


QUANTITY 


DATE 


QUANTITY 










i 

























































































































































































FORM 10 
This card illustrates the simplest form of perpetual inventory. Provision is also made for in- 
dicating the maximum and minimum amounts. 



DESCRIPTION , 

BALANCE OF STORES 



A. When Quantities Are Scheduled. Add Same to Column 5. 
INSTRUCTIONS B. When Requisition Is Written. Add Quantity Ordered to Columns I, la. and 4. and Subtract Irom Column 5.' 
FOR POSTING C. When Quantity Is Received. Subtract the Accepted Quantity Irom Columns I. and la. and Add to Column ?. 

0. When Quantity Is Apportioned. Add to Column 3 and Subtract from Column 4. 

NOTE: In All Columns. Bring Oown Balance With Each Entry and Verify That the 




FORM 11 

An example of the elaborate balance sheet used in some of the most detailed forms of management. 

The information and directions it contains are unusually complete. 



46 HOW TO FIND FACTORY COSTS 

that as the product of the direct manufacturing departments 
ultimately has to bear all the indirect expense anyway, it saves 
a certain amount of clerical work to charge the product im- 
mediately with as much indirect expense as possible, rather 
than charge one indirect expense on another indirect expense 
first, and then distribute the latter over the product. 

In the case of rent, for example, it may be simpler to charge 
the rent of the space occupied by the general offices and account- 
ing departments directly to "productive" departments, than to 
charge it first to the general offices and then distribute it, with 
other general office expense, to the departments which ulti- 
mately have to bear it. This policy is summed up in the rule : 
"Never charge an indirect expense to another indirect expense." 
Even when this rule is adopted, there must be important excep- 
tions to it, as in the case of tool departments and experimental 
or development work. 

The charge for power, heat, light, and ventilation is made 
up from the total power plant expense when the concern pro- 
duces its own power, or from the monthly charges for these 
necessities when they are purchased outside. Power plant 
charges include wages and salaries of attendants, fuel, water 
and supplies, and depreciation, together with interest (if in- 
terest is charged) on the investment. 

MAKING EACH DEPARTMENT BEAR ITS PROPER SHARE 
OF THE INDIRECT COSTS 

This total cost must be distributed over departments. 
Heat and ventilation are usually charged in proportion to the 
cubic contents of each department. Light, power and water 
should be measured and each department, or in some cases each 
machine or work-place, charged with the proportion actually 
delivered to it. Where it is the practice to charge these ex- 
penses directly to the machine, general lighting should be 
charged to each machine in proportion to the total floor-space 
occupied by it. 




KEEPING THE WORK MOVING 

There are thirteen standardized operations or positions in the manufacture of a 
freight car at the Pullman Company's plant. The first one is shown in this 
illustration. A pair of trucks are placed on one of the construction tracks; 
the completed car leaves the other end of the track — all the various stages in 
the building of the car folloio one another in logical order. 




STEPS TWO AND THREE 

Positions tioo and three in the manufacture of a freight car at the Pullman Com- 
pany's plant are here shown. Wagers are freely placed by the men, track against 
track, position two of track one against position two of track two, and so on down 
through the positions. This plan of progressive car building cuts costs twenty-five 
per cent, and promises even larger savings. 



INDIRECT COSTS 49 

The cost of handling materials includes the salaries and 
wages of the purchasing department, receiving clerks, store- 
keepers, material ledger clerks, shipping clerks, and the traffic 
department, together with all supplies used by them, depre- 
ciation on equipment, and the rent of the space occupied. 

The cost of transfer clerks, move-men, truckers, and of 
transportation equipment permanently located or used in a 
department, is usually charged as a departmental expense. 

The methods of ascertaining all these charges are the same 
as for the productive departments. The method of distribu- 
tion, which may either be an addition to the cost of materials, 
or a direct charge to the departments, will be discussed in a 
later chapter. 

HERE ARE A NUMBER OF GOOD WAYS OF HANDLING 
INSPECTION COSTS 

The cost of inspection is derived directly from the pay- 
roll. Inspection of product and of equipment should be 
charged, when possible, directly to the departments or jobs 
concerned. 

There is a certain amount of final inspection which can 
not be charged directly to a department. This is an indirect 
expense which must be apportioned. A method as good as any 
is to apportion this general inspection charge to each depart- 
ment' in proportion to the direct departmental inspection 
cost. 

When it is desirable to charge inspection to a specific job 
or order, the inspectors should work on time-cards, the same as 
direct labor employees, and indicate on the cards the jobs or 
orders to which their time is to be charged. 

The maintenance charge for the up-keep of yards, build- 
ings, and equipment, including machines, benches, shafting, 
belting, piping, wiring, and the like, is taken from purchase 
orders for work done by outside help, or from job cards on 
which all repairs are done, and from requisitions for supplies 
and materials used for repairs. In other words, these charges 



50 HOW TO FIND FACTORY COSTS 

are ascertained exactly the same as if they involved produc- 
tion orders, and are then charged directly to the department 
or machine concerned; or, if they can not be so charged, 
they are distributed over departments or machines as will be 
shown in a later chapter. The cost of the janitor and the 
watchman should be charged to maintenance, and is usually one 
of the general charges which has to be distributed. 

Spoiled material is any material in process, in which a defect 
has been found which necessitates additional work for repairs, 
or scrapping. This may happen either by reason of defects 
inherent in the material, such as blow-holes in castings, or may 
be the result of careless workmanship, errors in design, or 
defective machinery or tools. 

HERE ARE THE SPECIAL ACCOUNTS TO CHARGE WITH THE 
COST OF SPOILED MATERIAL 

In the case of inherent defects in materials, the manage- 
ment usually recovers the cost by billing it back to the source 
from which it was purchased. When this is not possible, a 
distinction should be made between defects in the material 
itself, and therefore beyond control, and those due to someone's 
error. The first should be charged to an account called "hidden 
defects" or "spoiled material," while the second should be 
charged to "reclamation of errors." 

The charge for "reclamation of errors" is made up from the 
job cards and requisitions for the supplies necessary for repairs, 
which are charged up to that account, and from inspectors' 
orders to scrap materials spoiled beyond repair. Where the 
cause of the charge can be definitely determined, a charge is 
made directly against the offending department and may for 
purposes of discipline and control be brought home imme- 
diately to the offending individual. In other cases the charge 
becomes part of the general expense to be distributed over all 
departments. 

This calls direct attention to the necessity and opportunity 
of improvement in departments and individuals, or of change 



INDIRECT COSTS 51 

in the design or materials of the product. Systematic pursuit 
of this policy reduced the spoiled material account in one 
concern from $300 a day to $60 a day within a period of six 
months. 

The amount of a royalty charge is taken directly from the 
vouchers. When the royalty is proportionate to the product, 
it is estimated each month from the production records and 
charged directly to the product. When it is an annual fixed 
charge, it is prorated monthly and charged to the department 
or the machine. Some manufacturers prefer to consider royal- 
ties, like interest, a deduction from gross profits, in which case 
they are provided for in the profit and loss account and do not 
enter into factory cost. 

HOW TO TELL WHETHER OR NOT TO CHARGE TOOLS, PATTERNS, AND 
EXPERIMENTAL WORK TO DIRECT OR INDDIECT COST 

Tools, patterns, and development work such as experi- 
mental models for new products, inasmuch as they are not sold 
like the product, are of course an indirect expense, of which the 
cost is ascertained in a way similar to that of repairs and 
alterations — that is, from job cards for labor and requisitions 
for materials, charged directly to the tool or pattern order and 
then charged to a particular job or order when possible; other- 
wise to departmental expense or to general expense to be dis- 
tributed over departments. 

There is an important distinction, however, to be borne in 
mind. Ordinary repairs and alterations do not add to the 
value of the plant and are therefore purely an indirect 
expense. 

Expensive tools, patterns, and experimental work, on the 
other hand, do add something to the value of the plant, 
although, as will be shown later, they must be heavily depre- 
ciated. This being the case, it is important that the full value 
of tools, patterns, and models be ascertained. To do this it is 
necessary that they be fully charged with all items of indirect 
as well as direct expense involved in making them, just as 



52 HOW TO FIND FACTORY COSTS 

though they were part of the product to be sold. This is a 
clear case where "indirect on indirect" is properly chargeable. 

For clerical convenience, it is advisable to symbolize these 
various items of indirect expense by some system of numbers or 
letters, or both, as described in a later chapter. The cost 
symbol indicating the nature of the charge and the order 
number, department number, or the symbol to which it is 
charged, appears on all vouchers for labor and materials charge- 
able as indirect expense, and these charges are then posted to 
monthly summary sheets for each job, order, or department, as 
the case may be. (See Forms 15 and 16.) All indirect 
expenses charged directly to departments are posted on the 
same sheet to each department and, afterwards, if desired, dis- 
tributed over separate jobs or orders. 

Daily records of expense are kept as indicated by Forms 
14A-D (pages 56 and 57), 18A-D (pages 80 and 81), and 
18E-F (pages 122 and 123). Forms 14A-B are the front side, 
and Forms 14C-D are the back side of the same sheet. Forms 
18A-D and 18E-F are continuing forms, and cover all the 
details of Forms 14A-D, but, since they also give a record of 
private expenditures, they are intended for the use of princi- 
pals only. So as to keep that portion of the private sheet 
that refers to selling, nearer that part of the text concerned 
with selling, these forms have been split up as indicated. 

Monthly departmental summaries are made up as indicated 
by Form 16, while specific job summaries are compiled as indi- 
cated by Forms 15 and 36, the latter being a form used in a 
printing plant. 



SHOULD INTEREST AND DEPRECIA- 
TION BE INCLUDED ? 

It is a debated question whether or not interest on the 
investment should be included in manufacturing cost. In 
some plants it is the practice to include interest on all capital 
invested, whether owned or borrowed by the concern. In 
others, only the interest on borrowed capital is included in the 
factory costs; while in still others, interest is not included in 
the factory costs at all, but is figured in the profit and loss state- 
ment as a part of the earnings which is divided between the 
owners of the capital, whether those owners are members of 
the concern or not. 

The strongest argument for charging interest as part of the 
cost of production applies in the case of interest on borrowed 
capital. One manager says: "If borrowed capital is neces- 
sary to the conduct of the business, interest on it is as much a 
charge against production as is the cost of power. If interest 
on borrowed capital is included in the cost of production, it is 
logical also to include interest on capital owned. Otherwise, 
part of the product would be accidentally burdened with a 
charge from which other parts were free." Another argu- 
ment in favor of this procedure is that by including interest in 
the cost of production, the selling price may in times of stress 
be reduced pretty close to actual cost and at the same time leave 
a fair margin of return on the capital. 



54 



HOW TO FIND FACTORY COSTS 



STORES SYMBOL 



LOCATION 



QUANTITY 



CREDIT TO 



KIND OF UNIT 



POUNDS 



COST PER UNIT 



TOTAL VALUE 



PLEASE CREDIT WORKED MATERIALS ORDER NO.. 
WITH 



AND CHARGE BACK TO STORES 

NOTE: IF THIS ISA TRANSFER TO ANOTHER ORDER, THIS CREDIT MUST 

BE ACCOMPANIED BY A REGULAR STORES ISSUED AGAINST SUCH ORDER. 



STORES CREDITED 



MONTH 



OAY 



YEAR 



FORM 12 
Sometimes it is possible to reclaim material which would be otherwise wasted on incidental manu- 
facturing operations. It is debited to the storeroom, and when disposed of, the storeroom is credited. 



MONTH 



Tf 



YEAR 



i<t'4 



MB. (\jo<J<Jb^yZ^^\ 



I HAVE TODAY COUNTED THE FOLLOWING MATERIALS IN STORES AND HAVE CORRECTED THE TAGS ANO BALANCE SHEETS WHERE NECESSARY 



SYMBOL 



Zci. 



DESCRIPTION 



# i ^^JI^JC^ 



QUANTITY 



ACTUAL 
in eiH 



1HL 



SHOWN 
ON TAG 



1M.C 



SHOWN ON 
BALANCE SHEET 



VHfe 



REMARKS 



.Mr 



PRODUCTION 
MANAGER 



SIGNED ^X^Q-k&^L^l^x 



STORE CLERK 



.BALANCE CLERK 



FORM 13 
The symbol and description are taken from balance sheets. If the balance sheet and bin tag 
agree, the account is correct. If they disagree, the balance sheet and bin tag are adjusted accordingly. 






INTEREST AND DEPRECIATION 55 

The argument against the inclusion of interest in the cost 
of production is strongest when applied to capital owned 
entirely by the concern. The owners of capital have an option 
whether they will invest' it in other enterprises at the normal 
rate of interest — getting their return without further exertion 
or great risk on their part — or, on the other hand, put it into 
a manufacturing enterprise of which they undertake the man- 
agement and the whole risk, and from which they hope to get a 
larger return than normal interest in the form of manufactur- 
ing profits. They have a right to do either but not to do both. 
If they decide to manufacture, their net profit' should be in 
excess of the current rate of interest; otherwise it would be 
safer and easier to invest their capital at the normal rate. 

WHY INTEREST SHOULD NOT BE CHARGED TO COST OF 
PRODUCTION 

From this point of view, interest on borrowed capital is 
merely a share of the profits which has to be paid to the owner 
of the capital ; and while it is a cost of doing business, it is not 
a cost of production and therefore should not be charged in 
the manufacturing cost. 

While it seems to me that the preponderance of logic is in 
favor of excluding interest from the cost of production, it 
remains true that practice is about equally divided, as there 
are advantages to both methods. A third method suggested — 
charging interest on borrowed capital only to factory cost — has 
no sound logic, extensive practice, or substantial advantage in 
favor of it. 

Where interest is charged to the cost of production, the 
total yearly interest charge is prorated monthly to depart- 
ments or to machines as explained in a later chapter. 

Depreciation is the most difficult and most elusive element 
of factory cost. It occurs gradually, is easily overlooked, and 
when its effects become manifest in the form of obvious wear 
and tear or actual breakdown, it appears, almost out of a clear 
sky, to be remedied by repairs. It involves a considerable 



56 



HOW TO FIND FACTORY COSTS 



• 




,MII 


INVOICE 


PURCHASES 


PUNT. ETC. ADBITONS RENEWALS AHO SHOP EXPENSE 




SUPPLIES OR 
PARTICULARS 


STORES FOR MANUFACTURINa 


RENTS. 
RATES 
AND 
TAXES 


MATERIAL. 


.LABOR 


>C. 


NO/ 


GENERAL 


ELECTRICAL 


GENERAL 


ELECTRICAL 


GENERAL 


ELECTRICAL 






SWITCHES, 
MOTORS.ETC 


INSULATINS 
MATERIALS 


.1 




















































:2 




















































3 




















































I 




















































I 




















































e 




















































7 




















































8 




















































8 




















































10 




















































n 1 




















































12 

13 




















































<a 








— 


































' 










49 




















































50 




















































51 




















































52 





















































FOSM 14A 

This detailed continuous analysis book is used in the office. In it is entered every type of expen 

diture incurred throughout the business, and which passes through the ordinary office 







PLANT AND MACHINERY 


SMALL TOOLS 


SHOP FITTIKGS 


PATTERNS. DRAWINGS 
AND BLOCKS 


OFFICE FITTINGS 


BOIL 


A00ITI0NS 


RENEWALS 


ATTENDANT 


ADDITIONS 


RENEWALS 


ADOITiONS 


RENEWALS 


ADDITIONS 


RENEWALS 


ADDITION'S 


RENEWALS 


ADDITIONS 


GENERAL 


ELECTRICAL 


1 






















































2 






















































3 






















































4 






















































5 






















































$ 






















































7 






















































8 






















































9 






















































10 






















































11 






















































12 






















































13 






















































11 






















































48 












= 











































49 






















































SO 






















































SI 






















































PI 























































FORM 14C 
All the non-productive expenses are classified in special columns. Every week these are 
totalled and posted to a loose sheet of similar character (Forms 18 A-D, pages 70 to 81, and 



INTEREST AND DEPRECIATION 



57 





UJHMNt 


PACKING 


nmix* 


SUPER- 

: VISION 


OILS. CLOTHS, 
WASTE, ETC 


mLUS 
MO WATER 


CANVASSING 
BY NO*. 

TRAVELER 




ELECtfirCAL 


GENERAL 


ELECTRICAL ' 


GENERAL 


ELECTRICAL 


6ENE8AI j 


ELECTRICAL 


CEHERAL 


ELECTRICAL 


SEHEMJ. 


MATERIAL 


um 


MATERIAL 


LABOR 


MATERIAL 


UBOR 


MATERIAL 


UBOR 


























































































































































































































































































































































































































































































































































































































































































































































































































_j>__ 
























































"— ' "* 






'^ J *~ 








"*" 










































































































































































































































































































































U. 




















~— 


_ 





















FORM 14B 

records. It may also be used for making analyses of invoices or other 'payments. Orders are 
carefully separated from the work done for the factory itself. 





MBS 


REPAIRING OAMAGEO 
SPECIALTIES 


EXPERIMENTS 


INSURANCE, 

WORKMEN'S 

COMPENSATION 

AND FIRE, ETC, 


CARTAGE 


A0VERTISLN6 


OFFICE 
EXPENSES 


EXHIBITION 
EXPENSES 


STATIONERY 
AND 

PRINTING 


RENTS, 
.RATES 
AND 
TAXES 

SELLING 




RENEWALS 


GENERAL 


ELECTRICAL 


GENERAL 


ELECTRICAL 


GENEPJJL 


ELECTRICAL 






















































1 






















































2 






















































'3 






















































4 






















































5 






















































,6 






















































j> 






















































8 






















































9 






















































10 






















































It 






















































12 






















































13 






















































14 






















































48 






















































48 






















































50 






















































51 


















































.' 




52 



FORM 14D 

Forms E-F, pages 122 and 123) which covers all the details of Forms 11* A-D, but, since it 

also gives a record of private expenditures, it is intended for the use of principals only. 



58 



HOW TO FIND FACTORY COSTS 



PART NO. COST PER 100 PIECES 


OPERATION 


1000 PIECES- 


1S00 PIECES jj 




MATERIAL 


EXPENSE 


LABOR 


MAN 


MATERIAL 


EXPENSE 


LABOR 


MAN | MATERIAL 


EXPENSE 


LABOR 


MAN 


MATERIAL 


EXPENSE 


LABOR 


MAN 


DEPT. 1-BUNK 


































FORM 


































% 


































MACHINE RATE 




































































DEPT. 3-DRILL 


































SEAM 


































% 


































MACHINE RATE 




































































DEPT. 4 


































POLISH P.W. 


































% 


































KPT.S-PLATE 


































% 


































DEPT. 6 


































LACQUER 


































% 


































INSPECTION LOSS 


































(100 PIECES) 




































































TOTALS 


































FACTORY COST 


































SELLING EXPENSE 


































PROFIT 


































TOTAL 



































FORM 15 
In order to facilitate the assembly of summaries of the cost of a specific job, this form is used. 
The four-part cost in each department is given. At the top is shown the cost per 100 pieces 



DEPT. 














% 

TO PRODUCE LABOR 


MISCELLANEOUS 


TOTAL EXPENSE 














MAY 1915 






EXPENSE 


AMOUNT 


TO PRODUCE LABOR 






FLOOR RENT 










































MACHINERY RENT 










































HEAT 










































LIGHT 










































POWER 










































STORE KEEPER 










































TIME AND OFFICE 










































LEDGER 










































[17 
OEPTS. {11 

la 


















































































PAYROLL 










































. . 




















































































i . 



















































































































































































































FORM 16 

Here is a typical form used for bringing together in one place a summary of the total expense oj 

each department. This form is made up monthly. 



INTEREST AND DEPRECIATION 59 

element of prophecy, judgment, guess and accident; and even 
when an earnest effort is made to take proper account of it, it 
must forever remain more or less of a good approximation. 
The element of depreciation alone is sufficient to keep cost 
accounting from becoming an exact science. 

Depreciation occurs as the result of wear and tear due to 
active use, physical deterioration, neglect, inadequacy and obso- 
lescence. 

WHERE TO DRAW THE LINE BETWEEN MAINTENANCE 
AND DEPRECIATION 

Ordinary wear and tear of buildings and equipment is 
largely compensated for by current repairs. When these 
repairs are just sufficient for the maintenance of the plant and 
equipment, they are charged as maintenance expense as de- 
scribed in a previous chapter. When repairs and alterations 
are on a sufficiently large scale to increase the value of the 
plant or equipment, they produce an addition to assets and are 
charged, therefore, as capital expenditures. 

Depreciation, however, is only retarded and not stopped 
by repairs. A building may be made to last for centuries, 
but it' will eventually fall into decay if continually used. A 
machine eventually gets to the point where it is cheaper to 
scrap it than to repair it. Depreciation, therefore, must be 
figured on plant and equipment separately from maintenance. 

Many materials deteriorate more or less rapidly even when 
they are not in use. Perishable food products are an extreme 
example of this. Dyed cloths and yarns furnish another illus- 
tration. 

Neglect is a phase of depreciation by wear and tear and 
comes about from improper or inadequate maintenance and 
repair. This mistaken policy apparently keeps down the cur- 
rent cost of production, thereby apparently adding to profits 
unless compensated for by an increased rate of depreciation. 
A certain company congratulated itself for years on its excep- 
tional profits, only to find at the end of eight years that its 



60 HOW TO FIND FACTORY COSTS 

plant and equipment had gone to rack and ruin and that not- 
withstanding the fact that current repairs and maintenance 
had been neglected, no provision had been made for replace- 
ment. In other words, the profits were coming out of the 
capital originally invested in plant and equipment. 

Plant and equipment may be outgrown by the increasing 
demands of the business and the point reached where additions 
are not so much in order as a new building and new machines 
of a different type. This accelerates the scrapping of the old 
building and equipment and must therefore be added as a 
further element of depreciation. 

The progress of invention frequently necessitates the scrap- 
ping of one type of machine in favor of a new and radically 
improved type long before the former is worn out'. This is a 
highly important factor in the electrical and printing indus- 
tries where new inventions are announced almost daily. 

Depreciation may be figured either by a periodical ap- 
praisal, or by an annual decrease of book value, by any one of 
several methods, or by a combination of both. The book depre- 
ciation usually has to be checked in the interests of accuracy by 
an occasional appraisal. 

The original cost of plant and equipment being taken from 
the books, the value at any time may be determined by an 
expert appraisal. This is too difficult and intricate a subject 
to enter into in detail here, and one which it is beyond the scope 
of this book, which is written primarily for factory managers 
and not for those chiefly interested in making appraisals. 

HERE IS A PLANT, REPLACEABLE AT $12,000, WHICH WAS 
APPRAISED AT $40,000 

The best advice that I can give is that an expert appraiser 
be retained for the purpose, care being taken to be sure that 
the expert is an experienced appraiser and has a practical 
knowledge of the industry for which he is engaged. I have 
known an expert appraiser of art works to value the equip- 



INTEREST AND DEPRECIATION 61 

ment of a small bindery six years old at $40,000, when it could 
have been replaced new for $12,000. 

There are three well-known methods of figuring deprecia- 
tion of book values. All of these involve, first, the price or 
cost of the item in question; second, an annual rate of depre- 
ciation ; third, the scrap value of the item. 

In all cases the probable scrap value is deducted from the 
original cost. The balance is the amount which has to be wiped 
out year by year during the probable productive life of the 
item. 

THREE WELL-KNOWN METHODS OF FIGURING DEPRECIATION 
WHICH ARE USUALLY USED 

The three usual plans are the percentage on original cost 
plan, the percentage on diminishing value plan, and the sink- 
ing fund method. 

By the first method — the percentage on original cost plan — 
the difference between the purchase price and the scrap value 
is divided by the number of years in the estimated productive 
life, and book value is depreciated each year by the amount' of 
this quotient. For example, if a machine costs $1,600, and is 
to be scrapped at the end of ten years at a probable price of 
$400, the annual depreciation is at the rate of $1,600 — $400 
or $1.20 a year. 10 

This is the simplest, easiest, and most common method. It 
fails to take into account, however, the fact that depreciation 
is much more rapid during the early productive years than 
during the later years. A new machine loses more of its value 
during the first year of use than during the last. 

To meet this objection, the percentage on diminishing value 
plan has been devised. By this plan, the depreciated value 
each year, is further depreciated by the same fixed percentage, 
this percentage taking into account the estimated productive 
life. In the example already given, this percentage would be 
about fifteen per cent. The depreciation would then be as 
follows: 



m HOW TO FIND FACTORY COSTS 

First Year, 15% of $1600 . 00 or $240 . 00 leaving a book value of $1360 . 00 

Second Year, 15% of 1360 . 00 or 204 . 00 leaving a book value of 1156 .00 

Third Year, 15% of 1156 .00 or 173 .40 leaving a book value of 982.60 

Fourth Year, 15% of 982 . 60 or 147 . 39 leaving a book value of 835 . 21 

Fifth Year, 15% of 835 . 21 or 125 . 28 leaving a book value of 709 . 93 

Sixth Year, 15% of 709 . 93 or 106 . 49 leaving a book value of 603 .44 

Seventh Year, 15% of 603 . 44 or 90 . 52 leaving a book value of 512 . 92 

Eighth Year, 15% of 512 . 92 or 76 . 94 leaving a book value of 435 . 98 

Ninth Year, 15 % of 435 . 98 or 65 . 40 leaving a book value of 370 . 58 

Tenth Year, 15% of 370 . 58 or 55 . 59 leaving a book value of 314 . 99 

This method is almost as easy to apply, and is more accurate, 
than the percentage on original cost method. 

Both these methods are valuable where the depreciation 
fund is treated as a book asset and continues to be used in the 
business. It is the usual practice to provide for such a fund 
before declaring dividends or paying profits. It is not cus- 
tomary, however, to make an actual cash reserve, as this fund 
can be more usefully employed in the development of the 
business than in merely drawing bank interest. 

USING THE SINKING FUND METHOD TO DETERMINE THE EXTENT TO 
WHICH ASSETS HAVE DEPRECIATED 

There are instances, however, where it is desirable to have 
on hand at a definite time the exact amount necessary to replace 
the depreciated assets, as> for example, when a fixed time is 
set for the termination of any business, or where conflicting and 
contested interests may at any time require a liquidation. In 
these cases the third, or sinking fund method, is the best. 

In the sinking fund method, each year an amount is set 
aside which, accumulated at compound interest, will in the 
aggregate produce an amount at the end of the estimated depre- 
ciation period, equal to the original investment'. The methods 
of figuring this are quite complicated, but tables are published 
showing the amounts that have to be set aside at various rates 
of interest for various periods to secure a given total. If you 
will write to the publishers of this book — the A. W. Shaw Com- 
pany, Wabash Avenue and Madison Street, Chicago, they will 
gladly inform you where you can purchase tables of this type. 



INTEREST AND DEPRECIATION 63 

With the aid of these tables the accountant's work is much 
simplified. 

A fourth method, which it would be hard to justify logically, 
but which is nevertheless practical and easily worked, is that 
devised by Professor Cole of Harvard University. His object 
is to allow for the more rapid depreciation during the early 
years, He does this in the following way. Suppose the esti- 
mated life is five years and the difference between the purchase 
price and the scrap value is $1,500. The total of the numbers 
representing the number of years of life, one, two, three, four 
and five, is fifteen. The depreciation will then be as follows : 

First year 5/15 of $1500.00 or $500. Fourth year 2/15 of 1500.00 or $200. 
Second year 4/15 of 1500.00 or 400. Fifth year 1/15 of 1500.00 or 100. 
Third year 3/15 of 1500.00 or 300. 

It is obvious that the different items of plant and equip- 
ment will depreciate at different rates. A concrete building 
will last longer than a wooden shack. Boilers will depreciate 
at a different rate from land, tools, or horses. The rates 
selected depend largely on the judgment and experience of the 
estimator and may vary with climatic conditions, operating 
conditions, and even types of management, all of which affect 
the probable life of each item. 

HOW TO USE STANDARD RATES OF DEPRECIATION WHEN 
BASED ON NORMAL CONDITIONS 

Nevertheless certain rates have become generally accepted 
as standard. With these standard rates based on normal con- 
ditions in mind, it should not be difficult to make such varia- 
tions as are required by particular circumstances. 

The only rate not to use is that which is dependent on the 
profits of the business. Profits may come and go but depre- 
ciation goes on forever. The policy which depreciates heavily 
during prosperous years and not at all during periods of de- 
pression is misleading and improvident. The rate of depre- 
ciation is an objective and impersonal fact inherent in all the 
physical conditions. It depends neither on the feelings of the 



64 HOW TO FIND FACTORY COSTS 

management, nor on profits, although profits may be seriously 
affected by the rate of depreciation. 

The preliminary expenses of the organization and develop- 
ment of the company show no visible and permanent asset and 
should therefore be cancelled quickly, say in five years at the 
most. The same is generally true of the cost of good will 
when purchased. 

WHAT TO DO WHEN PROPERTY APPRECIATES IN VALUE 
INSTEAD OF DEPRECIATING 

In a growing community land does not depreciate in value. 
It may even appreciate rapidly. Conservative practice, how- 
ever, takes no account of appreciation on the books until the 
property has become too valuable to use for manufacturing 
purposes. If land is depreciating, however, this depreciation 
should be duly noted. It had best be obtained by appraisal. 

The deterioration of the buildings depends on the nature of 
the construction and the character of the industry. In rough 
trades, such as the manufacture of iron and steel, constant 
repairing and rebuilding is necessary. In machine shops, 
where there is heavy vibration, the rate of depreciation is also 
comparatively high; while in textile mills and printing plants, 
where the machines are placed on solid foundations, the rate 
may be very low. For a brick building of the first class, four 
per cent is about right ; of the second class, three per cent, and 
of the third class, two or two and one-half per cent. Cheaper 
buildings of wood or iron should depreciate at higher rates 
ranging from five to ten per cent. 

The rate of depreciation on machinery depends of course on 
its durability, which is affected by the severity of the work, 
the velocity, the overload capacity, the hours of work, renewal 
of wearing parts, cleaning and oiling, and the grade of labor 
employed. In addition the probability of obsolescence must be 
considered. 

Steam engines and boilers are usually depreciated at five 
to seven and one-half per cent where proper attention is given 




IT PAYS TO MAKE A MAN'S WORK INTERESTING! 

Positions four, five and six in the manufacture of a freight car. There is a 
spirit of rivalry between the thirteen standardized positions on each construction 
track. The position behind is trying to feed cars to the next position faster than 
they can be received, while another position may be grumbling that it has finished 
and is being held up for work 



66 



HOW TO FIND FACTORY COSTS 



COST ASSEMBLY SHEET NO. 


ORDER NO. 


QUANTITY 


DESCRIPTION 


PART NO. 


LABOR 


MATERIAL 


EXPENSE 


DIRECT 



















































































































































































































FORM 17 
This is typical of the sheets on which the costs are assembled. Each sheet is numbered. Space 
is provided for the date, order number, the quantity, the description, the number of the part, the 



o 

o 


DESCRIPTION 


PERPETUAL 










QUANTITY 


SYMBOL OR 
MACHINE NO. 


DESCRIPTION AND MAKER'S NAME 













































o 


1 — "^ -1 




=z ■ — 















FORM 19 
This sheet is used for all the machines of the same type, as, for instance, turret lathes. A symbol 
indicating the type is inserted in the upper right hand corner, such as "LE" for "engine lathe. 



INTEREST AND DEPRECIATION 



67 





















flATF 






ACCTS. 


TOTAL COST 


F3LI0 


DEPT. NO. 1 


DEPT. NO. 2 


DEPT. NO. 3 


DEPT. NO. 4 




GENERAL 



































































































































































































































































































































FORM 17 

labor, the material, the direct expense and the general expense, and the total cost. There are also 
columns for the different departments concerned. 

















SYMBOL 




INVENTORY 




SHFFT Nfl SHFFTS 




DEPARTMENT 










DATE 
PURCHASED 


ORIGINAL 
COST 


AMOUNT OF 

YEARLY 

DEPRECIATION 


DEPRECIATION 
TO CEASE 


DATE 
SOLD 


TOTAL 
PRICE 


DATE 
SCRAPPED 















































































































































































































































































































FORM 19 
The symbol for the specific machine is noted in the column 

as, for example, "LE5." 



'Symbol or Machine Number, 




AN EMPLOYEE'S "TOOL RELEASE" 

When a workman leaves the Pullman Company he reports to the paymaster, 
following a visit to the central tool room, where he turns in his complete equipment 
and quickly receives a "tool release," which is a printed check, numbered, 
showing that he has surrendered his tools and equipment. Without a "tool 
release" it is of course impossible to secure final pay from the paymaster. 



INTEREST AND DEPRECIATION 69 

to upkeep and repair. Dynamos, portable engines, motors, 
and electrical equipment could be figured at from ten to fif- 
teen per cent, although the scrap value may be high and the 
total loss not so great as might be inferred from this high rate 
of depreciation. Ordinary types of machinery last from six 
or seven to fifteen years and should be depreciated accordingly. 

Patterns, drawings, and sketches are in a very different 
category. When made for a specific job or order, they should 
be charged to that order at once as expense. When they are 
made for a stock product, their value depends on the probable 
duration and extent of their usefulness. Conservative prac- 
tice depreciates them very rapidly. 

Where the industry can afford it, it is desirable to charge 
off immediately to expense all small tools and equipment. In 
some cases, however, as in machine shops, the investment in 
high-speed steel may be so heavy as to add something perma- 
nently to the value of the plant. In this case it is desirable to 
charge fifty per cent of the investment in tools at once to 
indirect expense, carrying the other fifty per cent as an asset 
until scrapped, which is pretty apt to occur within a year or 
two. 

An excellent Form is number 19, which lists on one sheet 
all the machines of the same general type as indicated by the 
symbol in the upper right hand corner. This form covers all 
of the facts necessary to take care of depreciation. 

Form 20 covers also interest on the investment, cost' of 
repairs, hours run (estimated and actual), and cost per hour, 
as well as the percentage of efficiency obtained by dividing the 
standard cost per hour by the actual cost per hour. If prop- 
erly kept, this form gives a complete record of the compara- 
tive values of machines. 



VI 



CHARGING EACH UNIT WITH ITS 
PROPER SHARE 



Having ascertained the amounts of the various items of 
indirect expense, there still remains the problem of charging 
each unit of product with its own proper share of the expense. 
This is as important as it is difficult, especially in a plant manu- 
facturing a variety of products, in which there may be some 
risk of selling certain items for less than they really cost, and 
of loading others with a selling price which puts them at a dis- 
advantage in a competitive market. It is only by charging each 
line with the share of the indirect expense which accurately and 
honestly belongs to it, that it is possible to act intelligently in 
the matter of prices, changes in design, and new developments 
in process and administration. 

Not long ago a manufacturer decided to close out a certain 
line on the ground that it was a losing proposition. If this 
was so, it was a bad sign for the concern, so an investigation 
was started. It soon developed that' the cost system in use 
apportioned the general expense in such a way that the depart- 
ment in question was burdened with several times the amount 
of expense it should have borne. The apparent loss of $15,000 
shown on the books proved to be a loss of $800. As the 
history of the department showed that ifrwas useful to the full 
line manufactured, it was decided to retain it. To-day the 
department shows fair signs of making a profit. Its advan- 



METHODS OF DISTRIBUTION 71 

tages would have been lost entirely had the old and defective 
cost system been followed. 

Of course it is possible to spend more in the effort to 
approximate absolute accuracy very closely than the result is 
worth. The all-important point is to be sure that every item 
of expense, without exception, is in some way charged to the 
total production sold. There may be instances where, if this 
is done, it is comparatively unimportant whether or not each 
item is charged with its absolutely exact share. This is true, 
for instance, where there is a wide margin of profit on all lines, 
or where the product is fairly uniform in price and direct cost. 
In this latter case the margin between the direct cost and the 
selling price is practically the same on all items, and a burden 
insufficient in one instance to cover the entire indirect cost is 
counterbalanced by the overcharge in another. 

ADAPTING DISTRIBUTION TO THE PURPOSES WHICH 
EXACTLY SUIT YOUR NEEDS 

In the great majority of cases, however, it pays to go to a 
reasonable expense to secure a sane degree of accuracy in the 
apportionment of indirect expense. The interpretation of this 
term "reasonable" must be left to the trained and experienced 
judgment of the responsible authorities. 

The apportionment of indirect expense is technically known 
as distribution. This distribution may be made to depart- 
ments, to functions, or to product, depending on the purpose 
for which it is to be used. 

In every case, distribution — here called final distribution — 
must be made to the product, as it is through the sale of the 
product that the indirect expense is eventually recovered. 

It is important for some purposes to make what may be 
called an intermediate distribution to departments for the pur- 
pose of controlling the indirect expenditure of departments or 
for the purpose of comparing this expenditure with a cor- 
responding expenditure a? other periods or in similar depart- 
ments or plants; or even to specific functions which may not 



n 



HOW TO FIND FACTORY COSTS 



Shop Ho. v s? & 3 Cescriptlon f^-^h Builder^ 0at8 /e? ^/^^ 


Year' 


INVESTMENT 


INTEREST 


DEPRECIATION \ 
(on machine alone) 


TOTAL 
INTEREST AND 
DEPRECIATION 


Inventory 


Auxiliary 
Equipment 


Total 1 


Rate 


Amount 




Amount 


Year 


Week 


Rate 


Year 


Week 


Year 


Week 


/?/# 


*fflr&*m. 


$$740*2. 


£/5 


%*& 


*m 


< /0%\ 


fc» 


*/.7f 


%MdhM" 


























<*> 

Month 


(2) 
Interest and 

Depreciation 
Expense 


REPAIRS 


(6) 

Grand 
Totar 


Hours Run 


Cost Per Hour 


Cost 

Efficiency 

% 


(3) 
Labor 


(4) 
Material 


(5) 
Total 


<7) 
Standard 


(8) 
Actual 


* (9) 
Standard 


(10) 
Actual 


X-OAAs. 


&30./7S- 








hb.ns 


A45- 


A3Z 


0//¥ 


A/ii 


1/ 


W%. 


AV.Ai 








l*/ttO 


/S\T 


//3 


o./s/ 


0>M 


6/ 


%l*A/, 


A ¥.%*• 








M.MO 


SL&O 


1% 


6.//0 


OXW 


*X 


Of*/. 


a.V.4* ' 


^7./6 


.0% 


Z/tf. 


3 L*m. 


xos 


/A(> 


0J$$ 


O.HVl 


L3 


*h»** 


so./ts 


./6 




./4 


§0.$H$ 


A 65" 


ftl 


OJ)*f 


0./17 


l>7 


LJ. 


.2**1 








M.teO 


ASL6 


/ft 


OJ/O 


6./8A 


f¥ 


%4t 


a.H.i± 








*¥.1U 


A./O 


m 


#.//£> 


O.fitt 


?3 


& 


3 0./2S 








3*./fcf 


SlIO 


X37 


O.//A 


6/3L7 


7? 


&fify 


ZV.ll 


3<f 




£t 


MS1.0 


Sl/c 


M*f 


0.//7 


OJSlI 


1* 


6f,J. 


$0./*r 








30./fo 


A7vT 


*¥7 


O.J to 


0.tl& 


90 


Olm* 


ZH.%1- 


M'// 


.0? 


/S'/b 


$%3f0 


A/0 


xzr 


o.m 


QJ77 


/03 


(&M>, 


a.*t. %%. 








5¥.aJto 


A/0 


A06 


6tn 


O./Al 


<?£ 


£&/ 


3)¥.U6 


XZ.77 


.&1 


uxi 


W3V0 


9.7¥S 


AZ6% 


O.ISL*? 


— ■#■ 


ro* 


i 


«*• ' ■-'• 






^ 


(JQ+C& 






(D-rCr) 


l>\*(t) 


f?)±C/o) 












iS 




























**avt>u 


^<p&ik 


f*t*jb> 






' 












{ 


9 F) 



























FORM 20 
On this card is recorded the performance of every machine in use. A glance indicates whether 
the repair charges are too high, and enables the manager to put his finger on the weak spot. 



DAILY TOE CARD 

WORKMAN'S Nfl 2-6 (0 DATE (X^^fL 74?VblL 


ORDER 
NO. 


NO. 
PIECES 


OPERATION 


HOURS 


AMOUNT 


PIECEWORK 
RATE 


*& 


hlt> 


< yCx^X-^AM-c^ 


7 


*> 


7L 




0\ 






r^^f g 













































































FORM 21 

On this slip the workman tells what he has worked on during the day. It is filled out just before 

quitting at noon and at night and handed to the department foreman. 



METHODS OF DISTRIBUTION 73 

necessarily be departmentalized, as, for example, supervision, 
inspection, maintenance, internal and yard transportation, and 
the like. 

It is often worth while to get detailed costs on a function 
for a short period in order to tone up the function in question 
and then drop it for another. For example, close attention to 
the cost of moving materials, carried on over a period of four 
weeks, revealed methods which reduced this cost in one plant 
by $30 a day. Then separate costs were secured for a similar 
period on inspection with like results. Cost systems should be 
so arranged that total costs of this kind may be had at any time 
desired, but without necessarily keeping then separately all the 
time, 

THIS IS THE ONLY ACCURATE WAY TO CHARGE 
INDIRECT EXPENSE OF MATERIALS 

If materials constituting indirect expense are issued on 
requisition and indirect labor performed on job cards, as 
described in previous chapters, the intermediate distribution to 
departments or functions is made very simple by posting the 
amounts of these requisitions and job cards to the accounts of 
the departments or functions to which they were originally 
charged. This is the best and only accurate way to handle such 
expenses as may be charged at the time they are incurred 
directly to departments or functions. 

There still may remain certain administrative charges which 
have to be distributed by estimate over departments, such as 
the salary of the general manager. The share of such an 
expense may be apportioned to the direct payroll of the 
department, or to the indirect payroll, or to both, and in most 
cases it is immaterial which method is used, provided only that 
it is easy to handle and fully accounts for every item of expense 
chargeable to the department. 

There are many methods of closing indirect expense finally 
into the product. No one of these methods is absolutely accu- 
rate; almost every one of them has it's advantages over the 



tt HOW TO FIND FACTORY COSTS 

others under certain circumstances; and in almost any plant 
made up of several departments, it may be desirable to use 
several of these methods at once, depending on the nature of 
the work in each department. Here again the selection of the 
method must be governed by the intelligence and judgment of 
the responsible authority, guided by the conditions of the case, 
the degree of accuracy sought, and the purpose for which the 
distribution is made. 

WHAT FINALLY BECOMES OF 
INDIRECT EXPENSE 

The more commonly used methods are the following: first, 
by estimated percentages revised by annual or occasional tests ; 
second, by direct wages ; third, by direct labor hours ; fourth, by 
the total cost of direct wages and materials ; fifth, by machine 
hours ; sixth, by machine hour rates ; seventh, by simple division. 
There are still other methods, such as distribution by the cost 
of materials, but they are of such limited and specialized appli- 
cation as to fall outside the scope of this book. 

By the method of estimated percentages, the total indirect 
expense for the year is reduced to a percentage either of direct 
labor or of the list price. This percentage is then applied to 
each unit of product during the succeeding year or until it is 
revised. 

This is perhaps the simplest and easiest method. 

For example, if the total direct payroll was $100,000, and 
the total indirect expense $135,000, 135% should be added to 
the direct labor cost of each item as that item's share of the in- 
direct expense. It should be remembered, however, that this 
method is usually the least exact and is accurate only when all 
the items of product go through practically the same procedure, 
involving the same relative proportions of hand labor, machine 
labor, transportation and supervision. If one line of product is 
made chiefly by hand labor, under this method it will be over- 
charged with costs belonging properly only to machine labor, 



METHODS OF DISTRIBUTION V5 

while the machine-made items will be charged with less than 
their proper share of expense. 

I saw a good example of this in a factory making electrical 
specialties, where an estimated percentage of 100% on labor 
had been used for a number of years. The factory had 
changed over from the assembling of finished parts purchased 
outside, to the detailed manufacture of all parts. The intro- 
duction of a large amount of machinery not before used had 
resulted in a considerable increase in the ratio of expense, but 
the old 100% figure was still used. It was not until serious 
loss began to develop along certain lines that the investigation 
was made. This investigation showed at once that the expense 
ratio should have been at least 150%, and using this figure as 
a tentative basis, the factory worked out of its difficulties. 

In any case, where this method is used, any overcharge or 
undercharge becoming apparent at the end of the year must be 
absorbed into profit and loss, or in some instances carried over 
to the succeeding year through a readjustment of the rate. 
Whenever there is a radical change in the methods of manu- 
facture or administration, a revision of the rate is called for. 
Except in very rare instances, the rate should be overhauled 
once a year and, in many cases, oftener. If conditions are such 
that frequent revision is necessary, the advantages of simplicity 
and convenience are thereby overcome and it is better to use one 
of the other methods. 

HERE IS AN EXAMPLE OF THE DIRECT WAGES METHOD 
OF CHARGING INDntECT EXPENSE 

In the direct wages method, the total indirect expense for 
the month is distributed over all the product made during the 
month in proportion to the cost of the direct labor. For exam- 
ple, if the total indirect' cost is $10,000, the total direct payroll 
$10,000, and job "A" cost $200 in direct labor, the job will be 
charged with $200 of the indirect expense. 

If there is much variation in the grade of labor used, this 
method throws the bulk of the burden on to the jobs requiring 



*6 HOW TO FIND FACTORY COSTS 

the highest-priced direct labor. This may lead to injustice, as 
it is usually the case that the highest-priced labor requires the 
least supervision and produces the least waste. 

Where machinery is used, it also happens frequently that 
expensive machinery involving a heavy indirect cost may be 
operated by low-grade help. This direct wages method would 
charge high-grade hand operators with most of the expense 
properly chargeable to the machine operations, being to this 
extent highly misleading. In short, it is safe to use this method 
only where all products go through practically the same opera- 
tions, or where there is only a slight variation in the cost of 
direct labor throughout the plant or department. 

By the direct labor hours method the total monthly indirect 
expense is apportioned to jobs or orders in proportion to the 
number of hours of direct labor spent on each job regardless 
of the cost of that labor. For example, if the indirect expense 
is $10,000, and the direct labor 15,000 hours, the job which con- 
sumed 15 hours labor will be charged with one one-thousandth 
of the expense, or ten dollars. 

ONE RESULT OF USING THE DIRECT LABOR HOURS METHOD WITHOUT 
ALLOWING FOR DIFFERENCES IN COST OF LABOR 

This plan overcomes to some extent the objection to the 
direct wages method based on differences in the cost of labor. 
By this method a more efficient operator, requiring less power, 
light, supervision, and the like, is charged with less indirect 
expense than his slower fellow workman. It is still open, how- 
ever, to the objection that the man without an expensive 
machine is charged the same proportion of expense as the 
operator of the most costly equipment, which may be mislead- 
ing. This objection is overcome of course where the equipment 
of the department or the plant is fairly uniform in cost per 
operator, and in such cases the method may be safely used. 

The total cost of direct wages and materials method is an at- 
tempt to reduce the errors inherent in the other methods already 
described by spreading them over a wider range in the hope that 



METHODS OF DISTRIBUTION 77 

one will neutralize another. For example, if the indirect ex- 
pense for the month is $10,000, the total direct wages and ma- 
terials $20,000, and the direct wages and materials on a given 
job $400, the indirect expense for that job is one fiftieth of 
$10,000, or $200. 

While there is no particularly logical justification for it, 
there are instances where no great accuracy is required, in 
which it may work with fair success, as, for example, where 
the products and processes are fairly uniform, or where the 
absence of machine expense on one type of product is counter- 
balanced by an unusually heavy material expense either for 
handling or for waste. This is a risky method to use and should 
be subjected to revision periodically, or on the occasion of any 
considerable change in product or methods. 

THIS PLAN WORKS WELL WHERE EACH OPERATOR 
TENDS MORE THAN ONE MACHINE 

The machine hours' method distributes indirect expense over 
jobs in proportion to the number of hours of machine time they 
have occupied and is figured in exactly the same way as the 
direct labor hours' plan. It is applicable to departments where 
most of the machines are tended by more than one operator or 
where each operator attends more than one machine. 

In such cases it is more convenient to figure indirect expense 
on the basis of the machine time than on that of labor time. 
The method is open to the same objection, however, of a pos- 
sibly wide variation between the costs of different machine 
operations. Maintenance, power, interest, and other charges 
may be light on a simple bench treated as a machine, and very 
heavy on a complex and expensive press or steam hammer. 
Only where the types of machines involved are fairly uniform 
in cost may this method be used with safety. 

The machine hour rate differs from the machine hours 
method in that the former attempts to charge each machine 
with all the expenses specifically chargeable to it, such as inter- 
est, depreciation, taxes, rent, power, and the like, as well as its 



78 HOW TO FIND FACTORY COSTS 

appropriate share of general expense, and reduces the entire 
account to a rate per hour to be charged against all work going 
through each machine. This is the most elaborate, and, when 
properly worked, most accurate plan of distribution and will 
be discussed at length in the next chapter. 

The methods thus far described are applicable mainly to 
industries manufacturing a variety of products, involving dif- 
ferent' costs of product, and where it may be desirable to know 
as accurately as possible the cost of each item, order, job or 
line. These methods are not necessary in an industry making 
but one line at a uniform cost, or in a concern working on a 
tonnage basis and putting all its product through practically 
the same operations. 

In both these instances, the simplest method, and one suffi- 
ciently good for practical purposes, is to divide the total indi- 
rect expense by the total number of units of product, whether 
this unit be an item of product, such as a flower pot or a twist 
drill; or a unit of weight, such as a ton of steel, or iron, or 
sugar; or a unit of length or area, such as a yard of yarn or 
cloth or foot of lumber. 

YOU CAN EASILY CHECK THE ACCURACY OF YOUR MACHINE HOUR RATES 
BY THIS VERY SIMPLE TEST 

Rates once set in this way may easily be checked by a test. 
They should be so checked at least annually, and on the occa- 
sion of any considerable change in manufacturing or admin- 
istrative methods. 

It is sometimes a question how much reliance should be 
placed on rates established for some more or less distant period, 
such as the preceding five years, year, or month, and how far 
the management is justified in incurring the additional expense 
necessary to keep its rates of distribution strictly up to date. 
This again is a matter for the [judgment of the authorities. 

Where business conditions, including the design and quality 
of the product, the labor conditions, processes, methods of 
administration, and the market, vary but little from year to 



METHODS OF DISTRIBUTION 79 

year, rates once established may be relied on subject only to 
periodical or occasional checking. These conditions, however, 
are apt to characterize only the stagnant business. 

The more typical growing business, in an active and rapidly 
changing market which necessitates frequent revisions of 
product and methods of manufacture and administration, can 
not safely trust to established rates of distribution without 
checking them so frequently that the cost of revision is apt to 
exceed the cost of a system sufficiently complete, responsive, 
and elastic to supply accurate information right up to the 
minute — that is to say, up to the last month or, at the best, the 
last week. In fact, sound judgment may approve a reliance 
oil established rates during periods of comparative quiet and 
the temporary tightening-up of the cost system during periods 
of comparatively rapid change, especially in the small business 
which can not afford to maintain permanently a staff of cost 
keepers. 

A cost system serves, among other objects, the purpose of 
insurance against disastrous errors. The value of the insurance 
is obviously dependent on the degree of risk and the amount of 
funds available, and each manager must settle this question 
for himself. 

THIS MANUFACTURER DOUBLED THE EFFECTIVENESS OF HIS WORKMEN 
BY INSTALLING A COMPLETE COST SYSTEM 

An interesting example of a cost system designed for a 
special purpose, which adopts the unusual procedure of charg- 
ing all indirect expense to rush jobs, was described in System 
as follows: 

"A manufacturer of machinery found his cost system too simple to deal 
with a number of problems, which ought to be accurately solved. The 
business has few competitors in its field, and gets an excellent price for its 
goods because of the fact that the product is well protected by patents and 
has a fairly steady market. 

"Because profits were reasonably sure and fairly large, there had never 
been any systematic attempt on the part of the managers, foremen or 
other supervising men to get the most out of the plant, the machines or 
the workmen. The elemental cost system first used merely gave a rough 
idea of the general cost of the finished machines; there was little or no 



80 



HOW TO FIND FACTORY COSTS 































































.... 




OATE 


PURCHASES 


PUNT, ETC. ADDITIONS. RENEWALS AND SHOP EXPENSE 


TOTALS FROM 
CASH BOOK 




STORES FOR MANUFACTURING 


MATERIAL 


LABOR 


tc, 


GENERAL 


ELECTRICAL 


GENERAL 


ELECTRICAL 


GENERAL 


ELECTRICAL 






SWITCHES, 
MOTORS.ETC. 


INSULATING 
MATERIALS 


i 










































































2 










































































3 










































































4 










































































5 










































































6 










































































7 










































































e 










































































9 










































































10 










































































11 










































































12 























































•_ 




















53 












— *] 




























































5 L 








































































■':. 





































































































































































































































































































FORM 18A 

These four sections of a sheet, together with the sections 18E-F (pages 122 and 123), make up a 
single detailed, analysis sheet showing the weekly totals of the analysis book (Forms l&A-D, 



tm 




FUEL. GAS AND WATER 


CANVASSING 

BY 
NON-TRAVELER 


PLANT ANO MACHINERY 


SMALL TOOLS 


SHOP FITTINGS 


GENERAL 


ELECTRICAL 


ADDITIONS 


RENEWALS 


ATTENDANCE 


ADDITIONS 


RENEWALS 


ADDITIONS 


RENEWALS 


GENERAL 


ELECTRICAL 




















































































































































































































































































































































































































































































































































































































( 




































































































































E 






























„ 
















































-__. 


- 


~ 


TZ^C 




p— ■ 


" 1 








i — p~~ 


— 




























— 


































































































































































1 





































































































































































FORM 18C 
This form enables the higher executives to keep close watch on the detailed expenditure. The fifty- 
two spaces provide a complete annual record of the business, which can be totalled for any 



METHODS OF DISTRIBUTION 



81 







UENTS, 


UB0R1TO 


racNin 


WUNTTNfi' 


SUPERVISION 


OILS, CLOTHS, 
WASTE, ETC, 


«ND 


GENERAL 


ELECTRICAL 


GENERAL 


ELECTRICAL 


GENERAL 


-ELECTRICAL 


GENERAL 


ELECTRICAI 


tAXES 

(MANTG) 


MATERIAL 


LABOR 


MATERIAL, 


LABOR 


MATERIAL 


LABOR 


MATERIAL 


LABOR 








' 














































































































































































" 



















































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































FORM 18B 

pages 56 and 57). The forms shown here however contain additional special columns for pri- 
vate and office expenditures, and hence are intended for the use of principals only. 



UFACTURING 


^s 




PATTERNS. DRAWINGS 
AND BLOCKS 




OFFICE FITTINGS 


BUILDINGS 


REPAIRING 
DAMAGED SPECIALTIES 


EXPERIMENTS 




ADDITIONS 


RENEWALS 


ADDITIONS 


RENEWALS 


ADDITIONS 


RENEWALS 


GENERAL 


ELECTRICAI 


GENERAL 


ELECTRICAL 
















1 
































































2 






























































3 
































































4 
































































5 
































































6 
































































7 
































































8 
































































9 
































































10 
































































11 
































































12 
































































5G 
































































SI 
































































52 








































































1 









































































































































































FORM 18D 
desired period. So as to keep that portion of the private sheet that refers to selling nearer 
that part of the text concerned with selling, these forms have been split up as indicated. 



82 HOW TO FIND FACTORY COSTS 

attempt made to determine specific costs on parts, while the costs on the 
finished machines, ready to ship, was in the nature of an estimate. 

"With the installation of a new system, it was found that the efficiency of 
the foremen and the workmen was raised greatly — in some cases doubled. 
This came about because it is possible, under the new system, to route an 
accurate cost card on any job at any time. Thus, it is possible to determine 
exactly, from the cost data shown on this card, what rate of speed the men 
are making, what materials are being used, and how a certain job compares 
with any other job, done either the same day or on any day subsequent to 
the time of the installation of the system. 

"This system, as now in operation, shows: 

(1) The exact cost on rush jobs 

(2) The average cost on all small parts 

(3) Detailed and accurate factory expense cost accounts, month by month 

(4) Accurate and detailed profit and loss statement for each month 

(5) Estimated cost on completed machines. This estimate is drawn from the daily record 
of the cost of type machines, by which is designated a machine that is duplicated from year 
to year 

"This furnishes a cost-keeping system which is somewhat different from 
the cost-keeping systems ordinarily used. The main difference is that 
ordinary systems usually do one of two things: (1) Merely scratch the 
surface of cost expenditures, failing to determine to a reasonable certainty 
the actual cost of the product, but rather securing an "estimate;" or 
(2) attempt to do something that may be impracticable, except at too 
great a cost — that is, secure exact costs on every machine that is put out. 

"This system is thorough enough to furnish practical data, for it lists 
all the costs that are necessary to a knowledge of what the profits are. 
And it does this in the face of the fact that the system does not secure costs 
on all completed machines, but merely takes a type machine for the day, 
week or month, and, after determining that the costs on that machine are 
running uniformly, it makes from these tests a standard cost for the 
machine. On the other hand, where parts are made continuously in bulk, 
the cost tests are constant. 

HERE IS HOW ONE MAN HANDLES RUSH JOBS ACCURATELY — 
AND IT'S QUITE SIMPLE 

"Another important point of this system is the method of application 
of factory expense. Factory expense is usually apportioned uniformly 
over all items manufactured. In this system it has been found most 
satisfactory to make rush jobs — of which there are a large number— bear 
the overhead of ordinary routine work. It has been found that rush 
jobs disorganize the regular routine of the works, and that the interruption 
of the customary routing and assemblying alone is enough to require the 
double application of burden. This plan is particularly feasible in this 
particular line, as rush jobs are always billed to the customer at one and 
one-half times the regular selling schedule. The theory of rush jobs is, 
in fact, that they are put through merely to protect the house. 

"There are two forms used in computing labor timet The first of these, 
shown in Form 21 9 is a slip which the workman fills out out showing the 



METHODS OF DISTRIBUTION 83 

disposition of his time during the day. He is required to see that these 
slips are filled out ten minutes before quitting time at noon and at night. 
While simple, these slips have been found to answer the purpose. 

"On rush jobs, the workmen's time slips, on a bright red stock, follow 
the job as it passes through the regular routing. On this slip the work- 
man jots down the time he spends on the job, turning it over to the next 
workman, who puts down his beginning time. The slip follows the job 
through the regular routine and, when summarized, furnishes automatically 
the total time spent upon it. 

"The foreman summarizes his workmen's reports on the sheets shown in 
Forms 22 and 23. Slips turned in by the average workman must be verified, 
and the time distributed and summarized. This work is made the duty 
of the department foremen. Productive labor is listed on one side of the 
sheet (Form 22) the reverse side (Form 23) bears an itemization of non- 
productive expense, such as unloading material, and so on. 

HOW FACTORY EXPENSE IS COMPUTED AND SEPARATED 
INTO DIVISIONS 

"Forms 24 and 25 show the cost sheet and comparative cost sheet. 
These cost sheets are used particularly on two kinds of jobs; bulk jobs, in 
which small parts are made in a uniform manner day in and day out; 
type jobs, in which the type machines are made up — the cost sheet 
following on them in about three cases out of ten. By allowing for a 
variation of three and one-half per cent in the cost of production of type 
machines, it has been found that there is no difficulty resulting from the 
finding of costs merely on a certain percentage of machines instead of on 
every one, as this percentage can be raised at any time. 

"Forms 26 and 27 show the factory expense account sheet and the 
profit and loss statement sheet. These are computed monthly. The 
factory expense account sheet divides expense into four groups, the first 
embracing taxes, insurance and salaries. The next division embraces the 
expense of construction and direction, including forge, manufacturing, 
dies, tools, assembling, grinding, hardening and finishing expense. Besides 
these, the expense of unloading materials, sweeping and oiling, handling 
stock, running errands, correcting mistakes, factory supplies, reserve for 
repairing tools and for accidents make inspection and direction expense. 

"The division under power, light and heat includes the expense of engi- 
neer and tools, unloading material and other supplies. ^ Shipping room 
expense includes the expense of labor, supplies and teaming. The repair 
account expense includes building and construction, power plant (not 
machinery), including motors, tools, transmission and belting, pipes and 
fittings, stock fixtures, and electric lights, office fixtures, dies and patterns. 

"The profit and loss statement, issued monthly, shows administrative 
expense, traveling expense and profits on various accounts. This method 
of figuring profits on individual accounts is one which tends to localize 
profits throughout the works, and, in case a certain account fails to show a 
profit, it means that either that department is running at too great an 
expense or else there is some leak or loss which needs investigation. 



VII 

THE MACHINE HOUR 
RATE PLAN 

The general impression of the machine hour rate plan 
prevalent among the managers of most plants is that it is a 
new, highly mysterious and complicated invention of cost 
accounting experts, intended mainly to create a demand for 
their services. They are made to feel that, whatever it is, it is 
something they ought to have and that on account of its com- 
plexity, they can only get it by hiring an expert' "to put it in" 
for them. 

The truth is that for some kinds of industry, especially 
those in which it is highly important that an accurate cost of 
each item of a varied list of products, and even each part, 
should be quickly available, the machine hour rate plan is the 
best, for reasons which will appear as its operation is described. 
There are many types of industry, however, in which the degree 
of speed and accuracy which this method attains is unneces- 
sary, and therefore the method itself disproportionately expen- 
sive. For the ordinary run of businesses, a combination of the 
methods described in the preceding chapter is sufficiently 
accurate and easier to install and operate. 

The current impression of the complexity and the difficulty 
of this method is somewhat exaggerated. There are really but 
two difficulties. The first is the difficulty of getting into the 
machine hour rate every possible item of factory cost. These 
are so numerous, and sometimes elusive, that if requires extreme 



THE MACHINE HOUR RATE PLAN 85 

care to round them all up. If a single one is omitted, it must, 
when found, be taken care of by an adjustment. In account- 
ing, every adjustment is a recognition of an error, and an 
accumulation of errors may be fatal to a system. 

The second difficulty concerns the disposition to be made 
of the cost of idle time — that is, the time during which the 
machines, through whose predetermined hours of operation all 
costs are taken care of, are unexpectedly standing idle. There 
are several methods, however, of handling this problem, none 
of which is very mysterious. Once the machine hour rate is 
determined, its application to the finding of current costs is, 
if anything, simpler than the operation of the other methods; 
and if due attention is given to the careful determination of 
the rate, and to the handling of idle time, a reasonable degree 
of accuracy may be reached in the average plant without the 
assistance of consulting experts. 

THIS PLAN IS EASIER TO APPLY THAN SOME OTHER METHODS 
YOU MAY KNOW ABOUT 

The essence of the machine hour rate plan is the collection 
of all factory indirect expense into an hourly charge against 
the product going through each machine, including in the term 
"machine" any bench or work-place, as well as the equipment 
usually given that name. Each machine (or, in a few instances, 
each group of machines) is treated as a "production center," 
for the use of which the product pays a rent as it goes through 
the production center, the rent depending on the number of 
hours it occupies the center — that is to say, if the machine hour 
rate or rent of machine "A" is one dollar and twenty cents, and 
of machine "B," two dollars, and a certain order "X" is on 
machine "A" three hours, and on machine "B" one hour and a 
half, "X" will have accumulated three dollars and sixty cents 
indirect' expense from "A," and three dollars from "B." By the 
time "X" is finished, it will have "rubbed off" from each 
machine its total share of the factory expense, which will have 



86 



HOW TO FIND FACTORY COSTS 





.. 


fiarrt Hn 






STANDARD MFG. CO. 

(Foreman's Report of 

Day Work 

Dona hy 


Workman's No. , Data 


Commenced Work Quit Work 


Job No. 


No. of 
Hrs. 


Article 


No. Gf 
Operation 




















































Total 














Foreman . 




Dept No. 











SHOP WORK 
ITEMIZE ALL ENTRIES 


NO. HOURS 


WORK 


BEGAN 


QUIT 




Sweeping 








Getting or sorting castings 








Delivering material 








Repairs to factory 








Getting lumber 








Hauling castings 








Grinding or setting dies 








Shifting stock 








Making or repalrng new dies or tools 








New machinery 








Repairing machines 







































FORM 22 FORM 23 

On this sheet the foreman summarizes there- On this, the reverse side of Form 22, the foreman 
'ports of time spent on productive labor. records the time spent on non-productive labor 









COST SHEET 




piot . _ nonpo tint 




Ml FBIll CAST PFB J?.- 11 " 

U8QR • '• • f * 


PARTKO. , , -.-- OFPARTMFNT, , - 




MATERIALS COST 


MATERIALS CREDIT 




DATE 
.19 


iStfU «™ E 


OUANTITY 


COST 
PRICE 


AMOUNT DR. 


DATE 
,' 9 


TRANS. 

HO. 


PIECES 
DELIVERED 


PER 

PIECE 


AMOUNT C 


R TtTDEPT. 








I 


































11 




































H 


























i 
















COMPARATIVE COST SHEET part 




1 










.PART NO. 




JL 






T 


DATE 

ORDERtO 

19 


ORDER HO. 


PIECES 


DATE 
COMPLETED 


COST PER PIECE 


jrfEMlC 




I 


ORDERED 


ACTUALLY 
COMPLETED 


SCRAP 


MATERIALS 


DEPT. 


LABOR 


fOTAU 






























































































































































































-^ -, 
















^ 


„- 












— J 










| 








p^ 






















V 


_^ . 




















































1 

































FORM 24 
On this sheet are detailed material and labor 
oats on small-parts, jobs or on "type" machines. 



FORM 25 

On this cost sheet appear comparative records 

of the costs of parts, jobs, or machines. 



THE MACHINE HOUR RATE PLAN 87 

been easily ascertained from the time cards showing the 
elapsed time of this order at each machine. 

The hour rate, or rent of each production center, is made 
up of three elements: first, the share of the building cost 
chargeable to the space occupied by the production center; 
second, the cost attributable to the nature of the production 
center itself, as, for instance, the cost of maintenance, power, 
and the like, for the machine; and, third, the share of general 
administrative expense which must in some way be apportioned 
to each production center. 

CHARGING THE PRODUCTION CENTER WITH ITS FAIR SHARE OF 
STRICTLY FACTORY EXPENSE 

Each production center occupies a certain amount of space 
for which it must be charged with its proportionate share of the 
cost of the entire building, including rent, taxes, insurance, 
depreciation, fire protection, janitor service, maintenance and 
interest on the investment, if interest is included in factory cost 
and is not already covered in rent. These charges can be 
apportioned in either of two ways. 

Suppose the entire plant area is ten thousand square feet, 
of which six thousand feet are used for strictly manufacturing 
purposes and four thousand feet for auxiliary and administra- 
tive purposes, such as storerooms and general offices. Then 
a production center occupying one hundred square feet may be 
charged with one hundred ten-thousandths of the entire build- 
ing cost as its share of strictly factory expense, and the store- 
rooms and administrative departments charged similarly with 
their respective shares. 

In this case, the share of plant expense charged directly to 
administrative and auxiliary departments must be afterward 
charged to the production center along with other administra- 
tive expense, as explained in a later paragraph. This method 
has the advantage of giving an accurate picture of the real cost 
of administrative departments. 



88 HOW TO FIND FACTORY COSTS 

By the other method, the share of building expense charge- 
able to the production center will be one hundred six-thou- 
sandths of the entire plant cost, thus apportioning at once to 
production centers their entire share of this cost. The only 
advantage of this method is a slightly greater simplicity in the 
establishment of the hourly rate. On the whole the first 
method is preferable. 

The building expenses enumerated in the preceding para- 
graph are practically uniform for every part of the plant. 
Other expenses incident to the building may vary with different 
departments and floors. This includes such items as general 
lighting, which will be less in those departments having the 
better natural lighting; heat, ventilation, and transportation 
equipment fixtures, such as traveling cranes and elevators. 

The total departmental expense for such items as these 
should be distributed to the machines in the departments served. 
Heat, general lighting, and ventilation are generally charged 
in proportion to the area occupied by the production center, 
and usually this same basis is also good for the cost of fixed 
transportation equipment, although, where greater refinement 
is desired, such equipment may be charged exclusively to the 
machines served by it. 

MACHINE COST AS AN ELEMENT IN THE MACHINE 
HOUR EATE 

The specific machine cost, as an element of the machine 
hour rate, includes those expenses which arise out of, and are 
directly attributable to, the production center, machine, or 
work-place itself. This comprises charges on the investment, 
such as interest and royalties (when these are included in 
factory cost), taxes, insurance and depreciation. In addition 
there are the charges incidental to operating the machine, 
including power and special lighting, determined by measure- 
ment; supplies, taken from requisitions on stores; and mainte- 
nance, including cleaning and oiling, taken from purchase 
orders for parts or work secured outside, and from requisitions 



THE MACHINE HOUR RATE PLAN 89 

for materials and job cards for work done by the permanent 
force. The annual investment charges are easily calculated 
from the purchase price of the machine, while the operating 
charges are the subject of estimate checked by experience. 

TWO GOOD METHODS OF DISTRIBUTING THE 
ADMINISTRATIVE EXPENSE 

The administrative cost factor in the machine hour rate 
includes the cost of administration and the auxiliary expense 
incidental to running the f actory, and covers the salaries of ad- 
ministrative officers, foremen, storekeepers, move-men, truck- 
ers, inspectors, accountants, clerks, and the like. To these fig- 
ures should also be added the cost of supplies incidental to the 
work of these men, of equipment used by them, and of plant oc- 
cupied (where this has not already been included in the rent 
charge of each production center as above described) . The total 
or actual estimated annual charge for these items may be dis- 
tributed equally over each production center hour, or may be 
apportioned in the ratio which the other indirect expense (that 
is, building and operating expense) per production center bears 
to the total of such indirect expense. 

By the first method, if the total productive machine hours 
are 100,000, and the total productive hours of production center 
"A" are 2,000, "A" will bear one-fiftieth of the total adminis- 
trative expense. By the second method, if the total building 
and operating expense of all production centers is $100,000, 
and the building and operating expense of production center 
"A" is $2,000, while the total administrative expense is $25,000, 
"A" will bear one-fiftieth of $25,000, or $500, as its share of 
the administrative expense. One of these methods is as good as 
the other. 

The best way to get all these factors together is to list the 
machines and production centers on a form which contains 
details that enter into the machine hour rate. Such a form is 
necessarily large, but not necessarily complicated. A sug- 



90 HOW TO FIND FACTORY COSTS 

gestion for a form of this sort is given in Form 51 (page 92). 
It can be modified to suit special requirements. 

All expenses, including those for building, administration 
and operation having been taken into account and charged in 
some way to each production center, we have the total which 
represents the annual charge of each production center against 
the production going through it. This annual operating rent, 
if it may be so termed, is then divided by the estimated number 
of hours that each production center will be engaged in actual 
production, in order to determine the hourly rate — that is to 
say, if the total annual charge against production center "A" 
is $1,000, and experience and estimate lead to the conclusion 
that "A" will be productively occupied for 2,000 hours 
during the year, the hourly rate will be $1,000, or fifty cents. 

2,000 
This estimate of 2,000 hours automatically distributes the cost 
of what might be termed the normal idle time of the machine — 
that is, the rest of the 8,760 hours of the year. 

The time occupied by each unit, lot, or order going through 
each production center is derived from daily or individual job 
cards. This elapsed time, multiplied by the hour rate, gives 
the indirect cost per operation, and the total of these costs con- 
stitutes the total indirect expense chargeable to the unit, piece, 
lot, order, or job — with one exception; namely, the cost of idle 
time. 

HERE IS ANOTHER ITEM WHICH IS SOMETIMES OVERLOOKED 
IN COMPUTING THE HOUR RATE 

Before proceeding to discuss the idle time factor, it may be 
well to mention another item which it is advisable in some cases 
to include in the hourly rate — that is to say, the labor cost of 
machine operators and attendants. While this is of course a 
direct cost, and may be determined from job cards as explained 
in a previous chapter, there are occasions, as where a group of 
machines is attended by a single operator, or where one machine 
is attended by an operator and several helpers, when it is more 



THE MACHINE HOUR RATE PLAN 91 

convenient to divide wages between machines and account for 
them in the hourly rate. Where wages are not subject to varia- 
tion in rate, as by bonus or premium, this is often the easiest 
way to handle them. 

Not infrequently it is necessary to include in the factory 
equipment certain machines which will be used only occasion- 
ally on special jobs involving unusual factors of size or weight. 
Although the normal estimated productive hours of most 
machines may be twenty- four hundred a year, an exceptional 
machine of this type may be normally worked only one hundred 
hours, and yet it has to be kept on hand for the few jobs which 
need it. The total expense chargeable to this special machine, 
distributed over one hundred hours instead of twenty-four 
hundred, gives an abnormally high rate per hour. 

SHaLL idle time be charged against special jobs or against 
the entire plant? 

Whether the jobs going through this machine shall be 
charged this abnormally high rate, or whether the cost of the 
twenty-three hundred hours of idle time shall be charged 
against the entire plant as a cost of doing business, is a question 
of policy to be decided by the management, having in mind the 
effect of either policy on the cost of each line of product 
Involved. 

The idle time just discussed is a definite predetermined 
quantity, which easily can be taken into account in making the 
machine hour rate. There is another variety of idle time aris- 
ing out of the fluctuations in the rate of production that can 
not be predicted. While the normal production hours may be 
two hundred a month at production center "A," the produc- 
tion record of "A" may show that only one Hundred and eighty 
hours of "A's" time were occupied. In this case the estimated 
monthly cost rental of "A" will not have been paid by the pro- 
duction going through this center. It' will be twenty hours 
short. 



n 



HOW TO FIND FACTORY COSTS 



DEPARTMENT D „ -. ..,..SH0P MACHINE, 

WOKTH 




ON BUILDINGS 




SYMBOL 
OR SHOP 
NUMBER 


KIND 
OF 

MAC!!. 


SIZE 


. 


wm 


MACH. 
HOUR 
RATE 


FLOOR n 
SPACE r B 

sajT. c 


EPftE- If 
ATION t 


SUft T 
NCE ' 


SI 
UtES 
R 


ORES 

AND L 

:p*s 


eat hem 


CARING TOTAL 

WATER AND BUILDING 

ClEANlS ITEMS 


»'£bs 














































































































































































































































































































































































































































































































































































1 






























































l;-^ 




















J=L= 










— - ~ ■ 





















= = ■* 


















































































.. _ 












































































































i 
































































































.:::: — t 





FORM 51 (Left Section) 

This form provides for the number and the symbol of the machine, its kind, size, bed, space and 

other pertinent dimensions. Then follows the hour rate. 



HOUR RATES 

DAY YEAR 


ON MACHINES 


POWER . 








T 

ORES REPAIRS 


IN- 
SPECTOR, 
DOLS SPEE0 

,g> FOREMAN U 
W AND 
CLERICAL 
MTE. 


iSC ' MA 


3TAL 
CHINE 
EMS 


MOTOR 
NO. 


II. P. 
PER 
FULL 
DAY 


REL- 
ATIVE 
TIME 


H.P. 
HOURP 
PER C 
YEAR 




ON GROUP MOTORS 
LINE SHAFTING, ETC. 


OTAt 

OWER. r 
OST 


BTAl 


MACH. . 
HOURS 
PER i 
fcSAR ' 


OST 
PER 
OCR, 


JHSUR- -. 


JWER c 
0ST° 

S 


EPRE- 
ATION ! 
ON / 
TYLE 


SUR-. 
NCE * 


roRis s 


ECRSL 


i 
p 

ma 
































r 








1 
































r 








































f 








































r 








































i 








































1 




























































































































































































































































































































































































... 
























































































































































MJJJJ_jJ_ 


1.1 IJ 1-U^j-- 












-.-h 










==LL 












































ITrTjT 




f 












































































r 




T 
















































































| 




































r" " 




r 




































r 




T 




































r 




T 










































































— L 


„„[,. 




I 







FORM 51 (Right Section) 

The totals for building costs, machine costs, and power costs give the grand total, which, divided 

by the machine hours per year, gives the cost per hour. 



THE MACHINE HOUR RATE PLAN 93 

There are two ways of handling this idle time shortage. 
The deficit may be made up, first, by the addition of a certain 
percentage to the cost of all work for the month in question, 
this percentage being determined and applied after the expira- 
tion of the month. This method makes idle time distinctively 
a factory cost, 

A SECOND GOOD METHOD FOR 
CHARGING IDLE TIME 

Under the second method, the cost of idle time is considered 
a charge against the business as a whole and is handled through 
the gain and loss statement, on the theory that not the factory, 
but business conditions in general, or the sales department 
specifically, are responsible for the shortage. The second 
method has several advantages over the first, in that it permits 
of accurate comparisons of factory cost, uninfluenced by fluc- 
tuations in market conditions, and also that it brings forcibly 
to the attention of the management the importance of keeping 
plant and equipment occupied at the full or normal capacity. 

In either case the amount of the shortage is determined by 
comparing the total machine hour charges for the month, as 
taken from the job cards, with the total predetermined charge, 
as taken from the original estimates. The balance, if any, is 
the cost of idle time. The total accounted-for cost is then 
divided by this balance, giving a percentage by which the 
accounted-for cost of each production center must be raised in 
order to absorb the entire actual cost for the month. 

For example, suppose the monthly estimated charge is 
$10,000. Of this cost, $8,000 are accounted for by job cards, 
or, in other words, the plant has been running at four-fifths of 
its capacity. The balance of $2,000 is the cost of unemployed 
equipment. 

If this is to be made a charge against production, it must 
be distributed over the orders which did go through. Dividing 
the total accounted-for cost ($8 ? 000) by the cost of idle time 
($2,000), gives a factor of twenty-five per cent, which is the 



04 



HOW TO FIND FACTORY COSTS 



FACTORY EXPENSE ACCOUNTS FOR MONTH M 


91 










NAME Of ACCOUNT 


AMOUNT 


NAME OF ACCOUNT 


AMOUNT 


TAXES FOB MONTH 












BALANCE 












INSURANCE FO* MONTH 
























SALARIES, OFFICERS 
























FOREMAN 
























WATCHMAN 
















































INSPECTION WD DIRECTION 




























































FORGE OEPT. 
























PRODUCTIVE LABOR FOB MONTH 












MANUFACTURING 




































DIE 
























| 


























TOOL 
























I 


























ASSEMBLING 




































GRINDING. HARDENING AND 




































FINISHING 
































































































UNLOADING MATERIAL 
























SWEEPING AND OHJNS 
























HANDLING STOCK 
























RUNNING ERRANDS 
























CORRECpNfi MISTAKES 
























FACTORY SUPPLIES 
















































RESERVE FUND FORHEPLACIHG 1ICS AND TOOLS 
























• • ACCIDENTS 
















































POWER, LIGHT AND HEAT 
























| 


































ENGINEER 


































FUEL 


































UNLOADING FUEL 


































OTHER SUPPLIES 


































1 


































SHIPPING ROOM 




























































LABOR 




































SUPPLIES 




































TEAMING 
































































































REPAIR ACCOUSTS 




























































•WL01NGS AND CONST. 


































H 


POWER PLANT MACHINERY 


































| 


MACHINERY F tl AND MOTORS 


































| 


TOOLS AW EFFECTS 


































| 


TRAHMRSSHMANDBELTim 


































| 


PIPE AND FITTINGS 


































H 


SHOP FUTURES AND ELECTRIC llffiT 


































j _ 


OFFICE FKTMDS 


































wauBHumn. 






















1 










| 
























1 










1 




































| 
























I 
























1 


























TOTAf 
























| 










■ 


' 








J 





FORM 26 

Here is a typical factory expense sheet for grouping the detailed factory expenses under their 
appropriate headings. The percentages are also figured on this sheet, and the totals computed. 



THE MACHINE HOUR RATE PLAN 95 

amount by which the cost of each job, as shown by the job 
cards, must be raised in order to absorb the entire cost. If the 
total machine hour cost of job "X," as shown by the job cards, 
is $300, twenty-five per cent, or $75, must be added to this 
figure, thus making the adjusted indirect cost $375. The same 
process applied to all jobs during the month results in absorb- 
ing the entire indirect expense as originally estimated. 

Form 28 is a convenient means for recording the total esti- 
mated hours and the total actual hours, and for making neces- 
sary adjustments based on experience. 

WHY USING PERCENTAGE FIGURES AS GUIDES TO 
SALES HELPS OUT 

It will be noted that the idle time percentage figure is an 
index to one aspect of the effectiveness of the concern; namely, 
its success in keeping the entire plant and equipment occupied 
full time. This may serve to a certain extent as a guide to the 
sales or order departments. 

4 It must be said, however, that this blanket percentage does 
not give sufficiently definite information to be of great value, 
for it may cover the fact that, while certain machines or groups 
of machines are running under capacity, others are working 
overtime. What the management really wants to know is what 
machines are running under capacity, so that stock orders or 
sales may be controlled to take up the slack where the slack 
exists. 

It is possible to get a percentage of idle time from a com- 
parison of the predetermined cost with the actual job card cost 
of each production center. This adds considerably to the com- 
plexity of the method, and the result to be obtained from it can 
be much better secured in another way — from production 
records for each production center. Such records show the esti- 
mated operating time for each month and against this the 
actual operating time, as shown by the job cards, and the cal- 
culated percentage of time efficiency. Such a form is illus- 
trated by Form 20. 



VIII 

HOW TO HANDLE THE COST 
OF SELLING 



From one point of view, the manufacturer is in business 
not primarily to produce goods but to produce profits. Profits 
are not made until the product is sold; and from this point of 
view the cost of selling is a part of the cost of production, at 
least of the production of profits. 

On the other hand, there is good reason for the current 
practice of considering selling costs quite apart from factory 
cost. Factory cost, with the exception of the part known as 
general administrative expense, has a close, real, and traceable 
connection with the manufacture of the product, and varies 
just about as the actual conditions vary. There is, however, no 
necessary connection whatever between the cost of selling an 
article and the conditions under which it is manufactured. 
Unless selling costs, therefore, are kept separate from factory 
cost, the value of costs as a guide to production is pretty apt 
to be lost. 

This practical line of reasoning has sometimes been carried 
too far. Granted that selling cost is not chargeable against 
production, but against profit and loss, it is nevertheless 
unnecessary and inadvisable in most cases to sever all connec- 
tion between selling costs and items or lines of product, for 
when this is done, the possibility that it may cost more to sell 
some lines than can be covered in the price secured for them is 
in serious danger of being overlooked. The fact is that in any 



THE COST OF SELLING 97 

business selling more than one type of product, it' almost always 
costs more to market some than others, and here, as elsewhere, 
competition may require as accurate a knowledge of the real 
facts as it is possible to secure without too great expense. 

HOW TO CHARGE COMMISSIONS, PREMIUMS, TRAVELING EXPENSES 
AND ADVERTISING COSTS 

I once asked the president of a specialty concern in New 
England how he apportioned selling costs. He said "I do not 
try to apportion them. I know pretty well what' the factory 
cost is, and at the end of the year I know my total income. The 
difference includes selling cost and profit. I have to cover sell- 
ing cost', so I put the price as high as I can and in this way I 
usually come out ahead." This policy may be all right for 
awhile for a small concern, but the progressive manufacturer 
to-day wants to know exactly what the selling costs are and to 
keep them as closely under control as he does his factory costs. 

Selling cost includes the salaries of all the officials who are 
concerned entirely with sales and the functions connected with 
sales, such as advertising, credit department, traffic depart- 
ment, sales accounts, correspondence, schools, and the like. To 
these must be added a portion of the salaries of general officers, 
such as the president and treasurer, part of whose time may be 
devoted to the selling departments. In some industries elabo- 
rate estimates, sketches, drawings, experiments, or investiga- 
tions may have to be made as a necessary part of selling the 
commodity or service. In these cases part or all of this expense 
may be charged directly to the order sought, but any part of 
it not so chargeable must be added to general selling expense. 

Commissions, premiums and traveling expenses must, of 
course, be included in the general selling expense. 

While in all cases a certain amount of advertising is for the 
benefit of all the products sold, and is therefore a general charge, 
ft often happens that certain advertising is special and limited 
in its character and mainly for the benefit of specific lines. 
A company manufacturing a variety of products, such as shirts, 



98 



HOW TO FIND FACTORY COSTS 



PROFIT AND LOSS STATEMENTS FOR MONTH OF 














191 






NAME OF ACCOUNT 


AMOUNT 


NAME OF ACCOUNT 


AMOUNT 




ADMINISTRATION EXPENSES 












PROFITS OH BOLT DRIVERS 




























* BORING TOOLS 














INSURANCE FOR MONTH 














* CABINETS AND STANDS 














INTEREST 














* C CLAMPS 














DISCOUNT 














* CLAW BARS 














ALLOWANCES 














* CUTTING OFF MACHINE 














SALARIES. OFFICERS 














• CUTTING OFF TOOLS 














CLERICAL 














* D&R HOLDERS 














POSTAGE 














• DOGS 














TELEGRAPH AND TELEPHONE 














• OMUL DRIFTS, AUTOMATIC 














OFFICE SUPPLIES 














• ' • C0MM03 














DONATIONS 














* OBILL SLEEVES 














LEGAL SERVICES 














* ORILL SOCKETS 














MEMBERSHIPS 














' * GANG PLANER TOOLS 














RESERVE FOR BAD DEBTS 














' DRILL VISES 




























* GRINDING HOLDERS 




























* KNURLING TOOLS 




























• PLANER JACKS 














,, 














* PLANER TOOLS 




























■ • RATCHET DRILLS. PACKER 




























* RATCHET DRILLS, SHORT 




























* RATCHET DRILLS, STANDING 




























' * RATCHET DRILLS. UNIVERSAL 




























' * SETSAOS80 




























' * SIDE TOOLS 














SaLIN6 EXPENSES 














' SLOTTER TOOLS 




























' * THREADING TOOLS 














SALARIES 














* TOOL POSTS 














COMMISSIONS 














" * TURNING TOOLS 














TRAVELING EXPENSE 


























TRADE JOURNAL ADVERTISING 


























CATALOGUE AND CIRCULAR ADVERTISING 


























CUTS AND ENGRAVINGS 


























. EXHIBITS 






— 




















= = ■ — = 






































PROFIT ON SINGLE PARTS 


























' *' ASSEMBLED PARTS 


























• ' PURCHASED MATERIAL 


























* ' CONSIGNMENTS 


























* *' WASH SALES 














RET mm 












INCOME FROM PROPERTY 








































TOTAL 












TOTH. 




























































i ■ 







FORM 27 

This monthly profit and loss statement shows the administrative and traveling expense and the 

profits on various accounts. This helps to localize profits and to discover leaks. 



THE COST OF SELLING 99 

shirt-waists, petticoats and undergarments, will usually adver- 
tise each of these lines separately, and if it uses catalogs may 
have a separate catalog for each class of product. Care should 
be taken to charge the special advertising to the line to which 
it is devoted in order to bring out into the open the varying 
costs of selling different lines. 

SHOULD DELIVERY COSTS BE CHARGED TO PRODUCTION 
OR TO SALES? 

In some companies costs of packing and shipping, includ- 
ing the expense of the traffic department, are charged as a 
selling cost. This expense is on the border line between pro- 
duction and sales. There is much to be said for the proposition 
that the product is not completed until it is packed and delivered 
at the f . o. b. point. So long, however, as the expense is covered 
either under production or sales, it is comparatively immaterial 
which method is used, except that where a company delivers 
free over a very large territory, the consequent wide variation 
in delivery costs should not be charged to production, as the 
variation would produce confusion in production costs. 

Many companies guarantee to replace, free of charge, 
defective articles or parts, if the defect is reported in a reason- 
able time after the sale, and even, in some instances, to provide 
a certain amount of labor in the form of service without extra 
charge. The cost of such replacements and service is evi- 
dently chargeable to selling expense, for the chief object in 
providing the service is to assist sales. 

It is often the case also that service departments are main- 
tained in the factory, and service stations at different points 
where repairs are handled. Charges are made for their work. 
These charges rarely cover the actual cost of the service, and 
the usual deficit also must be charged to the selling account. 

All the costs already enumerated in this chapter are derived 
from salary and expense vouchers, from requisitions for sup- 
plies used, and from purchase orders and contracts for 
advertising. 



100 HOW TO FIND FACTORY COSTS 

As stated before, where but one line is manufactured, the 
selling price of which is practically uniform and constant, there 
is no great gain in making any distribution whatsoever, except 
a simple arithmetical apportionment of selling expense per 
unit of product to insure setting a selling price which will cover 
the total cost. Where a variety of product is manufactured, 
however, it is desirable to segregate it into groups whose selling 
expenses are different. 

For example, a company may make a line of staple goods, 
which it sells by catalog, and another of specialties, which it 
manufactures on order only. The comparative expense of 
selling these lines is certain to vary widely. In such case the 
cost directly attributable to each line should be charged directly 
to it. 

In any case where it is desirable to apportion selling 
expense, there will be a certain amount of that expense which 
is general in its nature and not chargeable, therefore, to any 
given line. As with general factory expense, this general sell- 
ing cost must be apportioned on some arbitrary basis. 

HERE IS THE USUAL BASIS ON WHICH GENERAL SELLING 
EXPENSE IS APPORTIONED 

Three methods of apportionment are commonly used. By 
one of them, the selling expense is distributed in proportion to 
the number of hours of labor spent on the product ; by another 
it is apportioned in proportion to the direct wages cost ; by the 
third, according.to the total factory cost. In the great major- 
ity of instances, one of these methods is as good as another, and 
it becomes merely a question of relative simplicity and con- 
venience in handling. 

Unless the result' would be altogether too misleading, the 
total factory cost method is the simplest. 

It must not be overlooked, however, that the most expen- 
sive product is sometimes the easiest sold, in which case it would 
evidently be unfair to charge it with a share of selling expense 
proportionate to its cost. In this whole field the method used 



THE COST OF SELLING 101 

must be governed by the sound common sense of the responsi- 
ble authorities, bearing in mind that the object of any distribu- 
tion of selling expense is to aid in securing an intelligent 
control of sales policy and methods. 

A convenient means of keeping track of all selling expenses 
is illustrated by part of Form 18A-F (18E and F, on pages 
122 and 123). 

There remains the question of tying the factory's cost books 
into the general office's accounting books. This interesting 
subject is taken up in the succeeding chapter by a certified pub- 
lic accountant, Frederick B. Cherrington. Mr. Cherrington's 
chapter is followed by two more chapters by myself about a 
specific phase of cost accounting — classification systems and 
analyses of cost systems — and two chapters, descriptive of typ- 
ical cost systems, by Warren L. Green, president of the Ameri- 
can Bank Note Company, and H. A. Harris, secretary and 
treasurer of the National Regulator Company. 



IX 

TYING THE COSTS INTO THE 
GENERAL ACCOUNTS 



By Frederick B. Cherrington 

Certified Public Accountant 

In order properly to coordinate the books of the factory 
with those of the general office, the three factors entering into 
costs — material, labor and indirect expense — must show upon 
the general books as general ledger accounts. 

Inasmuch as material may consist of raw stock, goods in 
process of making, or goods completed and ready for sale, and 
as their several relations to the accounting department vary, 
each should be considered as in a class by itself. 

The stores account in the general ledger bears the same 
relation to the various kinds of raw stock carried that a custom- 
ers' ledger controlling account bears to the various individual 
accounts of the customers. At the beginning of any period, 
the amount of the account should be the total of the values of 
all stores on hand. 

The account should be debited during the period with stores 
purchased, the various accounts with commodities in the stock 
ledger or balance of stores record being debited with the indi- 
vidual entries. The stores account should be credited with 
totals of materials used, listed by individual kinds, and at the 
end of the period should represent the inventory of all raw 
stock on hand. The account would be represented as follows: 



COSTS AND GENERAL ACCOUNTS 



10S 



Dr. 



WORK IN PROCESS 



Cr. 



Inventory at beginning of period 00 

Purchases during period 00 



Goods withdrawn during period 00 

Balance will show amount of inventory 



Certain conditions may make it advisable to have this 
account subdivided. This is especially true where a concern is 
making many distinctive articles, each requiring an especial 
class of raw stock, or where storerooms are widely scattered. 
Each of these subsidiary accounts, however, would control its 
own group of stores records. 

To record properly the second step in making the product, 
another general ledger account is necessary. This is ordinarily 
called "work in process" or "manufacturing." The former 
term is both expressive and convenient. 

Just as the stores account controls the raw stock, so will 
this work in process account control the manufacturing of the 
article itself. Regardless of the kind of cost system employed 
or the methods adopted for distributing indirect expense, the 
account will contain the three essentials — material, labor, and 
indirect expense. 

To the ledger account then will be charged materials, labor, 
and indirect expense, applying against work in process; and 
goods completed and ready for sale will be credited to it. The 
balance should represent the value of unfinished work. The 
account may be thus expressed: 



Dr. WORK IN PROCESS Cr. 




Inventory at beginning of period 00 

Material 00 

Labor 00 

Indirect expense 00 


Finished goods at cost of manufacture . 

Balance will show inventory value of 
unfinished work 


.00 



The above account is in its simplest form. 
Business demands may indicate the need for several manu- 
facturing accounts, such as : 

Brass foundry — Work in process 
Iron foundry — Work in process 
Factory — Work in process 

In actual practice, moreover, the account may contain cer- 
tain manufactured articles which are not to sell. Improve- 



104 



HOW TO FIND FACTORY COSTS 



ments to plant and machinery, or new machinery, fixtures or 
equipment manufactured, are credited to "work in process" 
and charged to asset accounts, if they permanently increase 
the value of the plant. Repair work performed by one depart- 
ment for another is also carried through this account. 

In order to record the value of goods finished and ready for 
sale, it is customary to withdraw all finished goods from the 
"work in process" account and carry the values thereof into a 
ledger account which is usually termed "finished goods." This 
is a controlling account showing the total of all completed 
goods manufactured and ready for sale. 

The detailed list is shown on the stock ledger or balance of 
stores record. Many concerns with varied lines of product find 
it advantageous to subdivide this account on the general ledger 
and to use a controlling account for each class of article. Thus 
a concern manufacturing valves might have several finished 
stock accounts, as, to mention several specifically; 

Valves — all iron 
Valves — iron and brass 
Valves — all brass 

Occasionally finished goods are retained as part of the work 
in process account until sold, though the practice is not con- 
sidered a good one except under peculiar conditions. 



Dr. 



FINISHED GOODS 



Cr. 



Inventory at beginning of period 00 

Goods manufactured during period at 

cost 00 

Goods returned by customers at cost ... .00 



Cost value of goods sold during period . . .00 

balance will show inventory value at 
end of period 



As direct labor is directly related to the cost of a given arti- 
cle and indirect labor becomes a part of the indirect expense, 
the general ledger will carry a payroll account somewhat as 
follows : 



Dr. 



PAYROLL 



Cr. 



Weekly payrolls 00 



Direct labor to work in process 00 

Indirect labor to indirect expense 00 



COSTS AND GENERAL ACCOUNTS 105 

When the books are closed on a basis of thirteen equal 
periods of four weeks each, the above account would balance 
exactly at the end of each period, unless several days' pay were 
withheld by time-keepers, as is often done to permit clerks to 
figure their payrolls more carefully. In this event, and in case 
a business is closed upon calendar months, there will remain in 
the above account a credit balance representing labor accrued 
and unpaid. The amount of this balance thus becomes a liabil- 
ity and appears on the books in the general balance sheet. 

Indirect expense is one of the most important of all the 
accounts appearing on the books of the manufacturer. Meth- 
ods of handling its distribution have given rise to more argu- 
ments than the problem of the descent of man. It is the rock 
upon which many a ship of industry has been wrecked, and 
while different modes of treatment all have their advocates, 
even in the same industry there is much variance of opinion. 

Briefly, the indirect expense account is one which, as 
Mr. Thompson has already pointed out in previous chapters, 
carries all those indirect items which are necessary to the con- 
duct of a manufacturing concern, They are, in part ; 



Indirect Labor 


Insurance 


Taxes 


Water 


Heat, light and power. 


Repairs 


Rent 


Depreciation 



Some of these items may be definitely applied to depart- 
ments. Some may be known exactly in the aggregate, but can 
be only arbitrarily apportioned. 

This ledger account is charged with all items of indirect 
expense and credited with amounts charged periodically to 
"work in process." It is handled this way : 

Dr. INDIRECT EXPENSE Cr. 



Indirect labor from payroll account 00 

Departmental expenses 00 

General expenses — insurance, taxes, etc. . 00 



Indirect expense applied to "work in 
process" 00 



The entries which are to be made on the general books to 
the various controlling accounts may be expressed by a simple 



106 



HOW TO FIND FACTORY COSTS 



oept. MACHINE RATE 


MONTH 


NO. OF 
MACHINES 
INOEPT. 


TOTAL HOURS 
RAN 


EXPENSE 
TO RUN 


MACHINE 
RATE 


TOTAL HOURS 

IF RAN 

FULL TIME 


MACHINE RATE 

IF RAN 

FULl TIME 




Jan. 
























Feb. 
























Mar. 
























Apr. 
























May 
























June 
























1ST HALF YEAR 
























July 
























Aug. 
























Sept 
























Oct 
























Nov. 
























Dec. 
























2ND HALF YEAR 

















































^ FORM 28 

This simple machine rate card is a convenient means for recording the total estimated hours and 
the total actual hours, and for making adjustments which experience may show to be necessary. 



ORIGINAL 



AMERICAN BANK NOTE COMPANY 

I- OATE JXu-^^C ^ , 

THAVE THIS DAY DELIVERED TO THE .. S^^-A^ {] f\Jj /fr~a , M OEgABlMEMl 



'THE FOLLOWING PAPER FOR USE ACCOUNT OF JOB ORDER "ft , Hi f* t PROCESS N0_£L 
PURPOSE V*f» fe--»-6. 4-trw^U? 



1(0. OF 
SHEETS 



uri 



SIZE AND 
WEIGHT 



*1y 



?»»•'• «\. k ^^ 



DESCRIPTION OF PAPER 



i SIZE AND WGT. 
BEFORE CUTTING 



NO. OF 
SHEETS 



COST 

PER UNIT 



2± 



AMOUNT 



XL 



& 



FORM 29 

This is the form of requisition used by the American Bank Note Company. No paper can be 

obtained from the storekeeper except upon presentation of an order like this. 



COSTS AND GENERAL ACCOUNTS 107 

series which I will now give — in practice they may be somewhat 
further subdivided. 

Dr. Payroll 00 

Cr. Cash 00 

Amount of payroll for period 

Dr. Stores 00 

Cr. Vendors or Accounts Payable 00 

Recapitulation of stores purchased for period and charged to individual stores record 

Dr. Indirect expense. 00 

Cr. Payroll (indirect labor) 00 

Cr. Vendors or accounts payable (expense bills) 00 

Charges to indirect expense for period 

Dr. Work in process 00 

Cr. Payroll (direct labor) 00 

Cr. Stores (stores consumed) 00 

Cr. Indirect expense 00 

Manufacturing charges for period 

Dr. Finished goods 00 

Cr. Work in process 00 

Value of goods manufactured for period 

The "finished goods" account up to this point will contain 
the value of goods on hand ready to be sold. A few additional 
steps, however, are necessary when the sales are made. 

An account called "cost of sales" represents the cost price 
of goods sold — that is, the values at which goods have been 
carried in the "finished goods" account prior to actual ship- 
ment. The cost price of goods returned by customers must be 
credited to this account. It may appear thus: 

Dr. COST OF SALES Cr. 

Value of goods sold at cost price (credit I Value of goods returned at cost price ... .00 

to finished goods) 00 

This account is ordinarily allowed to run until the end of 
the fiscal period, and upon the completion of inventories of 
"stores and work in process," it is adjusted enough to correct 
any variations in these two accounts. It is finally charged off 
to the profit and loss account, and, by comparison with the 
sales account, which is closed at the end of the fiscal period by 
credit to the profit and loss account, will show the amount of 
the trading profit. 



108 HOW TO FIND FACTORY COSTS 

Dr. SALES ACCOUNT Cr. 

Value of goods returned by customers, Value of sales charged to customers, 
at selling prices 00 | at selling prices 00 

Dr. ACCOUNTS RECEIVABLE Cr. 



Value of goods returned by customers, 
at selling prices 00 



Value of outstanding accounts at 

beginning of period 00 

Sales charged to individuals, at selling 

prices 00 

Both the "cost of sales" and the "sales" accounts in a large 
concern may be divided into classes by sales segregation, and 
when several of these groups of sales are maintained, cor- 
responding cost of sales accounts will be carried. 

The "accounts receivable" controlling account may in its 
turn be subdivided to provide controlling accounts for two or 
more ledgers, such as, alphabetically by names, A-K, L-Z; or, 
geographically, City-Country, Foreign-Domestic. I know of 
many concerns operating accounts receivable in as many as 
twelve divisions, and have in mind one concern where thirty-six 
customers' ledgers are not only operated, but balanced exactly. 

A continuation of the general ledger entries after the 
finished goods stage may be represented as follows : 

Dr. Accounts receivable 00 

Cr. Sales •.•••••. : 00 

Value of goods sold at selling prices for the period 

Dr. Cost of sales 00 

Cr. Finished goods 00 

Value of goods sold at cost prices for the period 

Goods returned by customers present a slight complication, 
for they must be credited to customers at selling prices and 
charged back to stock at cost prices. The following entries 
show the intent clearly, the original sale entries being simply 
reversed: 

Dr. Sales 00 

Cr. Accounts receivable 00 

Value at selling prices of goods returned by customers during the period 

Dr. Finished goods 00 

Cr. Cost of sales 00 

Value at cost prices of goods returned during the period 

It is doubtful if any entry is slighted of tener than the one 
mentioned just above — crediting returned goods at cost prices. 



COSTS AND GENERAL ACCOUNTS 109 

Many large and apparently well-ordered concerns ignore this 
feature in handling returned goods. They continually credit 
customers and charge finished goods with the selling prices of 
the goods returned. In some cases the difference between cost 
and selling prices on returned goods may cause a shrinkage in 
the inventory of several thousand dollars. 



A SYSTEM OF CLASSIFICATION THAT 
MAKES IT HARD TO FORGET 

Aunt Delia's city nephew was watching her put up the 
week-end store of pies. 

"What are you marking that 'TM' on those for?" he asked. 

"So's I can tell what kind of a pie it is. I fill this up with 
mince meat, and mark it, and then when I look at the crust it 
stares me in the face: 'TM'— ' Tis Mince.' " 

"But you've marked this apple pie 'TM' too." 

"Of course I have, sonny. That 'TM' means "Taint 
Mince.' I haven't been makin' pies fifty years for nothing." 

Aunt' Delia missed by only two points a perfect system of 
classification and naming by symbols. She neglected to dis- 
tinguish between the numerous pies that are not mince, and 
her symbol lacked the quality of meaning only one thing. 
Otherwise she was all right, and has supplied an introduction 
to this, the first of the two chapters on classification systems 
and analyses of cost systems, which I have already mentioned. 

The correct method of classification is summed up in two 
words: analysis, the enumeration of elements; and synthesis, 
the re-grouping of details. 

To begin with, you list all the facts of your business, every 
detail and element, down to the last paper of pins and the last 
stamped envelope. Each bit of material in your storerooms, 
in process or in stock, each machine, tool, work-place and opera- 
tion, each bit of income and expenditure, and the duty of each 



THE MNEMONIC SYSTEM 111 

official and workman. At least this much must be definitely on 
paper and in your mind's eye before you can begin a compre- 
hensive classification. 

In practice you will not actually classify all these at once, 
of course. But to be in position to make ultimately a complete 
and unified classification, you must see that the field is staked 
out from the beginning, even if only in outline. You are really 
writing your own insurance policy; and it is up to you to see 
that nothing of value is left off the list. It is the things you 
forget that always make the trouble. 

Next comes the re-grouping of all these elements into the 
classes to which they logically belong. Each element must find 
its appropriate place according to the purpose of the classifica- 
tion. 

THE FIRST STEP — CLASSIFYING DETAILS AND ELEMENTS — 
AND A VERY IMPORTANT ONE 

If, for instance, you are dealing with functions, you will 
group the duties of the directors in one place, those of the 
executives in another, those of the workmen in another, dividing 
the latter up by departments or by the kind of work they cover. 
In handling charges, you will start with the old favorite division 
into direct and overhead expenses; and then subdivide into 
labor and materials, and shop and general expense, finally 
subdividing the last group to suit your taste. Your routing 
classification will include operations, materials, parts in process, 
machines and work-places and tools. When these are done 
the filing classification, as will be shown later, will take care 
of itself, for it is nearly identical with those already suggested. 

Certain items will appear in more than one classification; 
but there is no cause for alarm in this. Instructions for the 
operation of a monotype keyboard may be in the functional 
classification for details of method; in the routing classifica- 
tion for checking progress of work; in the charging classifica- 
tion for proper allocation of expenditure; and in the filing 
classification for reference to data. The same facts are dif- 



112 



HOW TO FIND EACTORY COSTS 



STEAM PRESS DIVISION 

RFPORT OF WORK FOR C\j<K^y ^^^ '* « '«- 
DENOMINATION GOOD BAD 


*M-7^ 


^o'kQxr.b ir-^A^ 


\ oo 


fW 


£ 




















































.— ^~_ 








~ " "J 

























FORM 80 

TAis record shows the tally of the issuing room from day to day, and gives an accurate record of 

"goods" and "bads." After the job is completed, the "bads" are burned up. 



o 


ORD 
TITL 
ORD 


FR ML 












OATF 






iq 




f'"' : 




FR 




r 








PRINTED 


DEL. 


PRINTED 


DEL 


PRINTED 


DEL 




DATE 


GOOD 


BAD 


GOOD 


DATE 


GOOD 


BAD 


GOOD 


DATE 


GOOD 


BAD 


GOOD 
























































































































































U- 
































L 












































• ■ > 










i 



FORM 31 

Here is the ultimate check on all departments. The last tally is entered on this permanent record, 

which must balance with the original requisition on the storekeeper for paper. 



THE MNEMONIC SYSTEM 113 

ferently classified for different purposes. They appear under 
the same name or symbol in all the lists; no confusion, there- 
fore, results. 

Everything will go well if you are logical and accurate 
from the start. 

The basis of classification is the similarity of certain 
elements in the things grouped together as "alike," and dis- 
similarity between other elements which distinguish one class 
from another as "different." Men are classified as animals, 
like the apes, on account of numerous similarities of structure ; 
but they are distinguished as men by the points of difference. 
Men are classified into races by including all with the same 
color of skin or the same shape of the head together in the same 
race, and all of different' colors of skin or shapes of head in 
other races. 

USE OF CROSS REFERENCES TO FACILITATE RECOGNITION 
OF PROPER SYMBOLS 

The elements of similarity or of difference chosen for 
industrial classification must be significant and essential; sig- 
nificant with reference to the purpose of the classification, and 
essential in the nature of the object classified. If you are 
classifying pencils with reference to charging them as direct 
or indirect expense, it is immaterial whether they are blue or 
not. If they are classified functionally, with reference to the 
purpose for which they are used, it makes considerable differ- 
ence whether they are blue or black. The blueness is accidental 
in the first case, significant in the second. 

Now that', with the aid of these few simple principles, you 
have corralled all your elements, and have rounded them up 
in logical and accurate groups, to suit your needs, you must 
brand them with marks which will make them capable of easy 
identification. A classification is no good unless you use it, 
and use it constantly. To use it conveniently, some system 
of naming the elements must be provided. 



114 HOW TO FIND FACTORY COSTS 

Now one type of machine may appear under several dif- 
ferent classifications. It is this "cross-reference" factor in 
classification that makes one basic system of symbols essential 
so that the object symbolized will always be recognized. 

A name is itself a symbol; "desk" is the symbol for a thing 
we write upon. When we want to designate a detail, such as 
the lever in the lock in the upper left-hand drawer of a desk, 
ordinarily we must use just this set of words. But it is too long 
for practical purposes, especially if we are to designate it very 
often, as one might in the manufacture of locks. It must be 
shortened into a symbol, which will mean exactly the same thing 
at all times and in all places, and never anything else. This 
symbol, since it is a shortcut, must be easily handled and, if pos- 
sible, easily remembered. 

HERE ARE THE FOUR QUALITIES WHICH WILL MAKE YOUR SYSTEM OF 
SYMBOLS PRACTICAL AND EASY TO USE 

A good system of symbols must have four qualities : First, 
simplicity combined with efficiency, with the emphasis on the 
efficiency. Simplicity in itself is no virtue; in the attempt to 
handle complex conditions it may be a vice. You are a care- 
ful manager, and you demand simplicity; when you go to the 
office in the morning you use the simplest vehicle you can find — 
a wheelbarrow, with your janitor or gardener for motive power. 
Or perhaps I am mistaken. You really prefer efficiency to 
simplicity, and go in an automobile, the height of complexity. 
In the same fashion, a system of symbols should be as simple 
as is consistent' with efficiency. Many concerns still use a 
simple number system, running consecutively from one to a 
million — as simple as a wheelbarrow. 

The second requirement is definiteness. There must be 
just one symbol to one thing, and one thing to one symbol, and 
the twain must be one. It' ought not to be necessary to put 
your finger on a thing in order to identify it. 

That is, of course, the time-honored way, still used. Men 
will say: "Order a desk like this" or "a ream of stationery like 




A PLATFORM FOR THE SALVAGE 

This platform was built for "salvaged''' tools when the Pullman Company decided 
to abandon the methods under which, to use the words of its president, "every 
workman got all the tools he wanted, as many duplicates as he could, in addition, 
and stowed them away." The illustration on the following page shows some 
of the "salvaged" materials piled on top of this platform. 




ON TOP OF THE "SALVAGE" PLATFORM 



Here are some of the "salvaged" tools piled on top of the platform shown in the 
illustration on the preceeding page. Thousands of dollars' worth of tools 
were brought together for orderly issuance by the establishment of the central tool 
room to which this platform is an adjunct. The illustration on the preceeding 
page indicates the placing of the platform 



THE MNEMONIC SYSTEM 117 

that," notwithstanding that in nearly all other relations of life 
language has carried us beyond the pantomime stage. Classifi- 
cation has given the name perfect definiteness of identification; 
the symbol should have this same definiteness. 

MAKING IT EASY TO REMEMBER 
THE SYMBOL 

Third, the symbol should have a mnemonic quality; that is, 
it should be capable of being easily remembered. This is of 
the greatest importance. It makes symbols convenient and 
easy to handle without constant reference to a key. It serves 
as a check on accuracy; if a symbol is incorrectly made, the 
next person reading it will notice that it means nothing. A 
mnemonic symbol which follows the classification of the thing 
symbolized sums up that classification in itself, as I will show, 
and is, therefore, a perfectly definite and logical means of 
identification. 

Finally, it must be brief. Practically this offers no diffi- 
culty, for any symbol is certain to be briefer than the name for 
which it stands, to the extent of from one-third to one-twentieth 
the number of letters. Here is a choice specimen from a 
catalog: "Lower-left-hand-cutting-blade-set-screw-lock-nut" — 
a full-blooded linguistic dachshund. A perfect symbol for that 
could not consist of less than eight or ten letters. 

The system which seems to meet all the tests laid down, yet 
comprehends the whole scope of industrial activity, is a com- 
bination of letters and numbers, predominantly mnemonic, 
which has been worked out mainly by Frederick W. Taylor 
and group influenced by him. 

This system is based on a complete and exhaustive analysis 
of every detail of labor, materials and organization involved in 
a business, as previously explained. The resulting list of ele- 
ments is then regrouped in a logical classification; first into 
broad general divisions, then each division into its subdivision, 
and each subdivision into as many groups and sections and sub- 
sections as the nature of the business requires. Letters are 



118 HOW TO FIND FACTORY COSTS 

used for each division, subdivision, and so on. Wherever pos- 
sible they are made suggestive, either by the use of the initial 
letter of the name or some other significant letter, or by being 
used always for the same thing. 

Numbers are used for dimensions or for job numbers, 
depending for their meaning on their special position in the 
symbol. Numbers are also sometimes used for the individuals 
in a class, as these ultimate elements are often so numerous as 
to go beyond the possibilities of the alphabet. They are also 
used at the beginning of symbols for operations, to indicate the 
first, second and succeeding operations on the piece symbolized. 

A GOOD EXAMPLE OF A SIGNIFICANT 
SYMBOL 

Obviously the same letter will often be used for different 
things, according to whether the thing is a division, a group 
or a section. Its particular meaning, therefore, depends upon 
its position in the symbol. In the symbol ASAMP the first A 
has a meaning as part of a division, the second A another 
significance as part of a group. It is just as it is with digits, 
which in the decimal system derive their significance from their 
position in the group. Thus 333 means 3 hundreds, 3 tens and 
3 units. There is no reason for confusion in one system more 
than in the other; and no one would read this combination of 
digits other than as three hundred and thirty-three. 

To make all this clear, suppose we construct a functional 
classification, taking for our example a small printing plant. 
This classification will include all the activities of the plant, 
productive, administrative, and selling, and will be broad 
enough to use for all purposes: costing, routing, control of 
materials, duties of officials, methods of work, sales organiza- 
tion and filing. We shall select one item to classify and sym- 
bolize: the instructions for the operation of a monotype key- 
board. 

It is clear that in the broadest view, this business consists 
of manufacturing, selling, and the connected administrative 



THE MNEMONIC SYSTEM 119 

and auxiliary activities. Auxiliary activities are those which 
are directly connected with production, such as power and light* 
administrative are those which are necessary to the conduct of 
the business, but do not enter directly into the product, such as 
accounting. 

HALF THE TRICK IN APPLYING THESE PRINCIPLES 
TO A SMALL PLANT 

For convenience we shall break up manufacturing, for our 
general classification, according to classes of product, and will 
also segregate stores and materials and the operations and 
accounts connected with the purchase of land, buildings, new 
equipment and tools. This utilizes more letters for broad 
classes, shortens the symbol, and is an aid to accounting. Then 
we set down the letters of the alphabet in column, omitting the 
I, O and Q on account of their similarity to the figures repre- 
senting one and zero, and fit our classes in, as indicated in the 
table given herewith, by means of which the entire system of 
classification is illustrated in connection with the typical 
operation of a monotype keyboard. 

To continue the classification of manufacturing, D, by 
departments: 

DC Composing Room 
DP Press Room 

Analyzing the composing room, DC, with reference to 
various features, we get: 

DCA Composing room functions not elsewhere classified 

DCB Miscellaneous labor 

DCC Fixtures, furniture and apparatus 

DCM Machines and work-places 

DCR Reclamation of errors 

DCS Stores 

DCT Tools 

DCZ Buildings 

The next step is easy: DCM, machines and work-places, 
includes: 

DCMF Proofreaders' tables 

DCMM Monotype machines 

DCMP Proof presses 

DCMS Imposing stones 

DCMT Type stands 



120 



HOW TO FIND FACTORY COSTS 



AMERICAN BANK NOTE COMPANY 

RECORD OF COST 



PLATE PRINTING 

NAME OF JOS 
NO Of JOS 
KINO 0/ IOB 



PAPER 



ENGRAVING 



ALTERATIONS . 
STEEL 



ROTARY 

ROBERTSON. 



BLANKETS ANO RAGS % PER 10CO . 



FINISHING CHARGES 

«S PER DETAILS ON BACK. 



TOTAL COST 



AVERASE COST PER 1000. 













ArV 


W 


CA 
f 

r 


NB 

-5SF 

ATH 


■MKf 

OATL 


NOTE CO. 

RY 


JOf NO.. ,_„..,., 
COLOR 




FIWIimAfM 


flllPir PRINTS 


( 






.SAMPLE MILL NO. 




ORDER NO! 




EMPLOYEE 

NUMBER. 


COST CARO' 

■mm 


.EMPLOYEE 
HDMBER 


COST CARD 
NUMBER 


EMPLOYEE POST CARS 
NUMBEJk NUMBER 














MATERIAL CARD 




ORDER NO. FORHIU* Mil 


PIGMENTS 


SAMPLE NO 


ANALYSIS NO. POUNDS' 


ouacEs 


ilp.; 


AMOUNT 














-1 


OILS 










— ' 






























VARNISHES 










































DRYERS 










































MISCELLANEOUS; 










































' TOTAL PIGMENTS 










































JOB NO. 


FIN 


SHED PRODU 

WT. FOR 


CT 


ORDER NO. 




























I 


1 


































TOTAL HOURS 

:m 


























LABOR COST 






















RATE 






















fH 


h 

ill 


TOTAL HOURS 
I 






















1 

1 


WEIGHING OUT- 






















MIXING DRY 






















MIXING WET 












































Ik 


CLEANING W 






















REWEIGHING 






















MACK MIXING 
















































MACH. CLEANING 


























SHIPPING 






















i 
1 


WEIGHING UN 






















STORING 






















'S 

Is 


i 
1 

1 


ANALYZING . 






















CARRYING 






















CUANING 






















EXPERIMENTING 


























CARD NO. L 






















I 


COST CARO 
MO. H 






















r •* 

I— 

I..- 


EMPLOYEE NO.' 






















NACRNoV, 
















































s 





FORM 32 FORM S3 

Whether the job has paid or not appears on This record shows the exact cost of everything 
this apparently uncomplicated record of cost. that goes into the ink required for any job. 



THE MNEMONIC SYSTEM 131 

Monotype Machines, DCMM, divide naturally into 

DCMMC Monotype casting machines 
DCMMK Monotype keyboards 

Operation is obviously P, so the symbol we are seeking is 

DCMMP Operation of monotype keyboard 

We can go on as far as we like in the analysis of keyboard 
operation, for tabular work, straight composition, justifica- 
tion, and so on. 

This symbol is a complete classification and identification 
in itself. The instructions in question are evidently for the 
operation, P, of the keyboard, K, of the monotype, M, which 
is a machine, M, in the composing room, C, which is part of the 
manufacturing, D, end of the business. The symbol iden- 
tifies the machine for the routing department, indexes the 
instructions in the methods of work, shows the accounting 
department that any charge in connection with these instruc- 
tions is a manufacturing indirect expense, and provides the 
filing department with a self-indexing system for filing all 
data on the subject. 

A CLEAR EXPLANATION OF SEVEN SYSTEMS NOW IN USE AND HOW 
THEY ARE APPLIED 

Almost every manager has been driven at times to some 
variety of symbolization. It is usually some expedient gotten 
up on the spur of the moment for some special purpose, such 
as identifying costs or salaries, or shortening names of fre- 
quently used items. There are, however, a few serious 
attempts at systematic symbolization, besides the one just 
described, which it is worth while to consider and to test by the 
qualifications laid down. 

There are several arbitrary systems, some of them made 
up entirely of numbers. One manager symbolizes the parts of 
a machine by dividing it first into groups and numbering them 
consecutively, and then dividing each group into its elements, 
also numbered consecutively. In the wheel group, which is 
the fourth, there are front hubs, front flanges, and so on. 
These are symbolized thus: 4/1, 4/2, and so on. The classifi- 
cation here appears to be practicable, and it is easier to write 
"4/1" than "front Hubs." 



122 



HOW TO FIND FACTORY COSTS 















SELL 




/"""" 


MANAGEMENT AND 
G. 0. SALARIES 


INSURANCE. 

WORKMEN'S 
COMPENSATION 
ANO FIRE. ETC. 


CARRIAGE 


ADVERTISING 


OFFICE 

EXPENSES 


EXHIBITION 
EXPENSES 


STATIONERY 

AND 
PRINTING 


RENT. 
RATES 
AND 
TAXES. 

(SELLING) 


LOAN INTEREST 

BANK 

COMMISSION 

AND INTEREST 


BAD 
DEBTS 


GENERAL 


ELECTRICAL 


GENERAL < 


ELECTRICAL 
























































































































































































































































































































































































































































































































































































































































































































































































































— 








































































t — Fj 

















































































































































































































































































































































































































































FORM 18E 

These two forms continue the sheet 'partly pictured on pages 80 and 81 as explained there. 
They provide for every possible expense connected with the selling, and make it easier to dis- 



^ fffifORMRWfc -r.. _ 












m 


BiMFOFflUnW 










imr 








FEflSO 








EONTH 




MODELING 


Saii.iSE 
IOTES 


SCRIPT 


MCTUSE 


CYCLQiD 


PANTASSAPH 


joining 


CLEAHIKS 


* 




























































^— - ■ 




















TOTAl 


It 


i- 


-r 






































KONTH 


















































































■ 
















-! 
















1 TOTAL 


















-fr" 































FORM 35 

It is on a record blank like the one shown here that the cost department of the American Bank Note 
Company makes the summary of the expense and the material on each job which goes through the 



THE MNEMONIC SYSTEM 



123 



ING 












\ 




DISCOUNTS 
ALLOWED 


TRAVELERS 


OFFICE SALARIES, 

DIRECTORS' 
AND AUDIT FEES 


PRODUCTIVE WORKS, 
WAGES Af.'D EXPENSES 


POSTAGE 

AND 

TELEGRAMS 


LEGAL EXPENSE AND 
PATENT RENEWALS 


SALES 






COMMISSIONS 


SALARIES 


EXPENSES 


GENERAL 


ELECTRICAL 




































































1 




































































2 




































































3 




































































4 




































































5 




































































6 




































































7 




































































8 




































































9 




































































10 




































































H 




































































12 























































































1 1— r— 




































































50 




































































51 




































































52 















































































































































































































FORM 18F 

tribute that expense. With the figures provided by this sheet, the management can readily 
cure an intelligent control over the expense side of sales policies and methods. 



CRAVING 








nFSRRIPTIDN (IF WORK 












ITERATIONS 


TOTAL 


TRANSFER 


TAKING UP 
ROLL 


LAYING OUT 
PLATES 


BUMPING UP 


CLEANING 


ALTERATIONS 


TOTAL 


DEPT 
BURDEN 


TOTAL 
















































































1 1 






h— d 










' ! 












.1 


TTV 












r- 


I 








MATERIAL 










STEEL 










TOTAL 


















































































* ■ 
















L . 




— — 














L__ 
























| 




























-r 





FORM 35 

engraving department of the concern. This record is, of course, permanent, and together with 
Forms 36 and 37, is designed to show the entire history of the work on each job handled in the factory. 




WATCHING THE COST ON BIG JOBS 

Building Pullman cars is a big job, but a cost system that watched the minutest 
details saved the Pullman Company hundreds of thousands of dollars. The 
president of the Company calls the results "astonishing" This illustration, 
which, by the way, gives only an idea of the actual size of the Pullman Company's 
plant, shows the cars in the process of construction 



THE MNEMONIC SYSTEM 125 

Brevity, however, is the only advantage of this method. It 
is not definite, for it does not, without further description, indi- 
cate the type of machine to which the hubs belong. It is there- 
fore not really simple, and it is not mnemonic. A similar 
system has been proposed for identifying costs: (1) annealing; 
(2) assembling; (3) babbitting; (4) bending; (5) blowing; 
(6) boring, and so on. This is subject to the same adverse 
criticism, besides being based on no logical classification at all. 

A WELL-KNOWN ACCOUNTANT USES THIS 
SIMPLE SYSTEM 

Many managers use a system which is an arbitrary com- 
bination of numbers and letters. For instance, one symbolizes 
departments thus: A, administrative; B, legal; C, business, 
general office; D, sales; E, accounting; F, purchases; G, engi- 
neering; H, drawing; I, planning; and so on. This plan is used 
to identify workmen and departmental expenses. Thus 4G 
is workman number 4 in the engineering department ; G4 is a 
subdivision of engineering expense. A well known accountant 
symbolizes private ledger accounts by the same method. A to 
D is assets ; E to H, liabilities. Cash is 1 A ; notes payable, IE. 
These are all short, definite, and comparatively simple; but 
they lose all the advantages that would accrue if they were 
suggestive. 

Sometimes you find a combination of arbitrary and 
mnemonic characters in a symbol. At times an effort is made 
to give mnemonic quality to numbers alone by grouping them. 
This has been applied especially to the classification of ex- 
penses. Thus one man gives this for a foundry : Direct labor, 
150 and 151 ; various expenses, 152 to 160; supplies, 165 to 169; 
maintenance, 170 to 175; departmental expense, 180 to 187; 
miscellaneous 190 to 194; commercial (administrative), 200 to 
207; and commercial (selling), 215 to 220. 

Another large establishment groups, somewhat less mi- 
nutely, into administration expense, 101 to 179; distribution 
(expense, 181 to 199. This system is short, definite, slightly 



126 HOW TO FIND FACTORY COSTS 

mnemonic, and simple — too simple, in fact. Those using it 
must either memorize the meanings of groups and of single 
numbers, or else constantly be referring to a key. It is there- 
fore inconvenient to handle. 

CARRYING THE GROUP IDEA TO ITS 
LOGICAL CONCLUSION 

The group idea is carried to its logical conclusion in the 
Dewey decimal system, well known from its use in public 
libraries. This apparently elaborate system, when applied to 
a logical classification, is in fact simple ; and when frequently 
used it is highly mnemonic on account of its strict and logical 
associations. It is brief and very definite. It can be applied 
to the filing of any data in an industrial or commercial estab- 
lishment, simply by making a basic classification to fit the case ; 
as, for instance, for catalogs, clippings, drawings, memoranda, 
and so on. Its great disadvantage is that its use is practically 
limited to filing. 

Under the Taylor system, as already indicated, the symbol 
for the instructions for the operation of a monotype keyboard 
would be DCMMKP. Let us compare this with what it might 
be by some of the methods just described. By one method it 
might be 233; by another, 17/11; by another, J6; by another, 
14C (slightly mnemonic) — all of them short and fairly definite, 
but too simple to be efficient, and in most cases not in the slight- 
est degree suggestive. Another method might symbolize it 
MON4, which would be better than any of the others. The 
Dewey system would perhaps call it 677.823.19. Most of these 
systems could not classify and symbolize such a detail at all, 
except in a purely arbitrary fashion; and such a symbol as 
they could furnish would necessarily have an exceedingly 
restricted use. 

The advantages of the Taylor system are, first, that it is 
absolutely definite ; for the moment you introduce a new factor, 
you have to change the symbol. Hence you can have but one 
symbol at any one time for each thing. It is mnemonic, for the 



THE MNEMONIC SYSTEM 127 

letters remind you of words whenever possible, and the arrange- 
ment in a logical classification indicated by the position of the 
letters in the symbol helps out your memory of their signifi- 
cance. That it is brief in comparison with the full name of the 
thing symbolized is obvious. It is as simple as is consistent 
with effectiveness ; and in practice is far simpler than other 
systems, on account of its qualities of defiriiteness and sug- 
gestiveness. 

WHY THIS SYSTEM IS USED IN "SCIENTIFIC 
MANAGEMENT" 

In addition to these advantages, the classification on which 
the system is based includes the entire business, and conse- 
quently the symbols used are applicable in every department 
and for every function, including accounting, routing, handling 
of stores and stock, checking progress of work, methods and 
details of selling, the filing of all records, correspondence and 
data, and the arrangement and location of materials, parts in 
process, stocks of finished goods, tools, machines and work 
places. 

It is self -indexing, like a dictionary or a city directory. 
This not only expedites the finding of any material, part, or 
record wanted, but greatly facilitates for the cost department 
requisitions, time tickets, bonus tickets, and so on. 

The time must come when a complete classification of all 
business will be made, similar to the Dewey classification of 
all knowledge. This is a task which calls for the resources of 
the Government, or, in default of them, it should be undertaken 
gradually, but with determination, by our great universities. 
And when it is made, I think the details should be symbolized 
in accordance with the system advocated in this chapter. In 
the next chapter this subject is carried into still additional 
detail — a partial analysis and classification for a factory is 
given — and several of the earlier chapters in the book sum- 
marized. 



XI 

TAKING FACTORY COSTS 
APART 



It is probably too much to say that a business can not exist 
without an adequate cost accounting system. Factories have 
struggled along for years without it. 

There is a concern in a western city which has what some 
might call a model accounting system — that is, taking "model" 
in the sense of "a miniature imitation of the real thing." The 
owner, who is the buyer, chief clerk, accountant, and repair 
man, has one book — the ordinary ten-cent Manila-covered 
butcher-shop memorandum book. On the left-hand page he 
enters all expenditures, dated but unclassified — this includes 
such items as postage, wages, cartage, advertising, insurance, 
magazines, and also his personal expenditures. On the oppo- 
site right-hand page are listed all receipts, also unclassified — 
receipts from sales, repairs, interest on money loaned, and 
so on. 

These columns are footed on each page, carried forward to 
the next, the grand totals taken at the end of the month, and 
the balance indicates to this man his profit or loss for the period. 
Depreciation, discount, and such details as that are too fussy 
for him to bother with. The business has been run on this basis 
for going on ten years ; and the fact that, while he is doing but 
a $60,000 business, he has on his shelves about $50,000 worth 
of stock aged anywhere from one to ten years, has not thus far 
worried the proprietor. 



COST ANALYSIS 129 

A man with one lung can get along, too. He lives, but his 
vitality is low and his life is comparatively short. 

It is too much to say that a man can not live on one lung, 
just as it would be rash to assert that a business can't get along 
with such a cost system as that just described. 

WHY "ONE-LUNG" BUSINESSES USUALLY 
NEVER GET WELL 

Most people, nevertheless, if they have a choice, prefer two 
lungs at least. So the business that wants to be healthy and 
long-lived prefers some cost accounting system which is at least 
sufficient for its needs. Our friend's business, for example 
can hardly get along permanently with a system which shows 
less than many times the amount of information he is now 
getting. 

In a good many factories, all the costs are carried in the 
manager's head. This same manager's head also carries all the 
information in regard to raw materials ordered, on hand, issued 
and needed. 

He also knows all about the time his orders are to be 
delivered, just what stage of development they have reached 
in the factory, what goes into them ; and when and how. This 
wonderful head also knows all about the men employed, how 
long they have been there, how good their work is, when they 
are deserving of promotion or advancement, and how they 
ought to do their jobs. The only fact its owner refuses to take 
a chance on is the money due from customers — here, at least, 
he is willing to admit that a paper record is better. 

An analysis of the contents of such a head would show that 
it is made up of a jumble of general impressions about every- 
thing, with very little definite and accurate information about 
anything. The man who knows the facts about his business is 
one who records those facts as they arise and classifies the in- 
formation thus recorded. 

This is particularly true of factory costs, for cost account- 
ing, though in principle comparatively simple, is in practice 



130 



HOW TO FIND FACTORY COSTS 



ARTICLE m. COST 


DATE 


J03 
NO. 


NO. Of 
LBS. 


LABOR 
COST 


MACHINE 
COST 


MATERIAL 
COST 


GENERAL 
EXPENSE 


REMARKS 


TOTAL 
COST 


AVERAGE 
COST 






































































































. 




















• 




















































J 



















































FORM M 

This card contains a summary of the exact costs and results, which is obtained from Form 33, 

where it is given in complete detail, and is forwarded to the cost accounting department. 




FORM 36 

The cost accounting department uses this record blank for summarizing in permanent form the 

expense of the work and the material on each job handled in the plate printing department. 



COST ANALYSIS 131 

necessarily complicated, involving as it does many little and 
elusive items. 

In analyzing and classifying your costs, the first thing to 
do is to find out what they are, and for this you will have to 
depend on records, and not on any man's head, however capa- 
cious. Material costs, as already indicated in previous chap- 
ters, should be taken directly from requisitions, without which 
no materials should be allowed to go from the storeroom. 
These requisitions should give the quantity, value of the ma- 
terial and the order number or the indirect expense to which 
it is to be charged. 

All work done in the plant should also be recorded either 
on a work ticket, which is the workman's authorization for 
expending his labor, or on some other kind of reliable record 
which records the amount of labor the workman has performed. 
This ticket or record should also indicate the order or the 
expense to which the labor cost is to be, charged. 

When materials and labor are to be charged to specific 
products, there is no great difficulty encountered in allocating 
the cost. The trouble comes in connection with the materials 
and labor and supervision that are to be charged to indirect 
expense. Indirect expenses are so numerous and varied that 
classification becomes absolutely indispensable. 

Once made, however, a classification becomes most easily 
workable when reduced to a mnemonic system of symbols as 
outlined in the previous chapter. Such a plan and method of 
classification and symbolization, applicable with slight modifica- 
tion to practically any manufacturing plant, will now be more 
fully described in this chapter. 

TAKING THE FIRST STEPS IN 
CLASSIFYING SYMBOLS 

The first question should be: "Is the product, on which 
work is done, to be sold?" If the answer is "Yes," then the 
charge is a direct one against product or "worked materials," 
which will ultimately be sold as merchandise. If the answer 



132 HOW TO FIND FACTORY COSTS 

is "No/* then the question is: "Does the work done, or the 
material used, increase the permanent value of the plant?" 

If it is for land and buildings, or machinery and motive 
power, the answer is undoubtedly "Yes," and you will have 
two accounts: one for "land and buildings," and the other for 
"construction." If it is for fixtures, apparatus, tools, and 
so forth, which depreciate rapidly, and on which it may be 
advisable to charge half the cost at once to "shop expense," 
and the other half to "construction," as previously explained, 
you have an account for "part construction;" and half the 
cost in this account will be transferred at regular intervals to 
"shop expense." 

DO YOU ADMIT THE IMPORTANCE OF STARTING WITH 
A KNOWLEDGE OF EXACT COSTS? 

If the work done, or the material used, does not increase the 
permanent value of the plant, then it must fall under the head 
of "general" or "departmental" expense. There are some 
departments of your business the work of which does not 
directly affect the product at all. For example, your account- 
ing department and your selling organization. You can manu- 
facture without them if you are interested only in making a 
product. 

You may charge one set of expenses then directly to the 
selling department and another set to what you may call admin- 
istrative or business departments. Another class of your 
expenses is necessary to carry on the work of manufacturing, 
such for example, as power, storerooms and tool rooms. With- 
out them, the product could not be manufactured at all. And 
yet they do not enter visibly into the finished article to the pro- 
duction of which they are essential. 

These may be either general expenses applicable to the 
whole plant or departmental shop expenses applicable to one 
department or another. Most of the last few pages may appear 
t'o contain but a recasting of material given in previous chap- 
ters — as a matter of fact that is so, for they are a summary 




A BIG CUT IN COSTS 

The adoption by the Pullman Company of a system that put a careful check on 
costs and methods resulted in remarkable savings. In the department which is 
illustrated above, for instance, the "shop shortage'' account alone was cut fifty 
per cent at least. This is typical of only one of the many benefits which 
usually result from the installation of a good cost system in a factory 



134 



HOW TO FIND FACTORY COSTS 

























SEA ISLAND TANNERY 

TIME SHEET 




























DATE 












TO BE FILLED IN IN THE OFFICE 






DFPARTMENT 




LOT NO. 


WORK DONE 


TIME 


RATE 


AMOUNT 


CHARGE 


















































DR. 

IN 


CR. 

OUT 








DATE 


LOT 


QUANTITY 


CONDITION 


COST 




DATE 


FINISHING 
NO 


QUANTITY 


COST 
































































































































DR. CR. 

IN 


OUT 
















DATE 


FINISHING 
LOT 


SKINS 


AREA 


COST 




DATE 


ORDER 
NO. 


SKINS 


AREA 


SELLING 
PRICE 



















































































































































































































































































FORM 39 (top) 

The workman leaves this time 

sheet at office at the night 



FORM 41 (center) 

This book records all partly 

processed stock in hand 



FORM 42 (bottom) 
Finished product is posted to 
this "finished stock book." 



COST ANALYSIS 135 

which I hope will serve well as an introduction to the immediate 
subject matter of this chapter — analyses and classification of 
costs — to which I will now at once turn. 

LAYING A FOUNDATION FOB 
YOUR ANALYSIS 

Suppose we lay out a base sheet. First, arrange the alpha- 
bet in column, omitting I, O, and Q; then fit in the broad classi- 
fications already given, following so far as possible the 
mnemonic method. You may call the general expenses which 
are necessary for the manufacture of the product "auxiliary;" 
administrative expenses may be termed "business"; selling 
expenses may as well keep their own name; shop expenses may 
be called "departmental"; you may also have an item for erect- 
ing, if the nature of your product is such that this is essential. 
These can go in at the top of the alphabet; and the last letters, 
X, Y, Z, may be for "part construction," "construction," and 
"land and buildings." Your base sheet will then look like this: 

A Auxiliary 

B Business 

C Selling 

D Manufacturing Departments 

E Erecting 

FtoR Products 

S Stores, Raw Materials 

T Tools 

X Part Construction 

Y Machinery and Motive Power 

Z Land and Buildings 

< This leaves the letters from F to W, inclusive. In order to 
connect this classification with other purposes of the factory 
than cost accounting, it is advisable to use S invariably as the 
first letter in the symbol for raw material. Similarly T is 
reserved for tools in the plant, where they are an important 
factor. The other letters then may be used for classes of prod- 
uct: such as G for grinders, K for milling cutters, M for 
molding machines, and the like, or K for coats, T for trousers, 
U for suits, V for overcoats and so on. 



136 HOW TO FIND FACTORY COSTS 

Then you will proceed to subdivide each of these items. 
For instance, your auxiliary group of expenses, A, might be 
further analyzed like this : 

AA to AD Unassigned 

AE Experiments for the benefit of manufacturing 

AF 

AG 

AH Heat, light and power 

AJ to AR Unassigned 

AS Storeroom 

AT to AZ Unassigned 

Then you will subdivide AH : 

AHA Salaries or wages to the engineer and fireman when their work can not be charged 
to any other expense item of this department, and any other labor connected with 
the running of boilers, engines, generators, and other machinery in the engine 
room 

AHB 

AHC Fixtures and furniture, both fixed and movable, and tools and other minor equip- 
ment in the engine room. Repairs and maintenance, but not new work 

AHD 

AHE Engines, boilers, and all other machinery including line shafting, pulleys and belts 
in the engine room. Repairs amd maintenance, but not new work 

AHF Fuel. Includes all materials used in firing boilers, inclusive of freight and cartage, 
receiving and cost of disposing of ashes 

AHG Gas used throughout building 

AHH to AHP Unassigned 

AHR Water rent 

AHS Stores and supplies, including stationery, which can not be charged to any other 
expense item of this department 

AHT to AHV Unassigned 

AHW Piping and fixtures for steam, gas and water. Also all electric wiring, repairs and 
maintenance, but not new work 

AHX to AHZ Unassigned 

The same kind of analysis should be made of all other items, 
including the product, which may be subdivided into the various 
kinds of grinders, milling-cutters, or suits and overcoats made. 
To carry out this plan of classification in detail for a simple 
plant requires a small volume and is a task not lightly to be 
undertaken. Such a classification must be made by each plant 
in accordance with its own specific needs, following strictly the 
fundamental principles of approved cost accounting. When 
once done, however, it is done for good; and until it is done, 
the management must wander in outer darkness, so far as 
costs are concerned. 

If every expenditure of labor or material is made on a 
written order or requisition, the symbol of the expense and the 



COST ANALYSIS 137 

order number should be on each one. When this is done, the 
cost department can have no difficulty whatsoever in properly 
allocating each cost. The allocation of direct labor and mate- 
rials to the product made is easy; but the proper distribution 
of indirect expense over the product, where it must finally 
land and be paid for by the customer, requires experience and 
careful thought, as I have already indicated. 

WHERE SOME COST SYSTEMS 
FAIL TO MAKE GOOD 

A cost system may be a thing of beauty in itself, but not 
necessarily a joy forever. For practical men, it must pass the 
test of usefulness. A mathematician, well known to engineers, 
was once enthusiastically explaining to some visitors the solution 
of a problem on which he had been working. He had con- 
structed a cylindrical model, open at both ends and with a 
crumpled up partition in the middle. 

He explained that he was trying to work out a formula for 
certain relations between this warped surface and the cylinder. 
He looked into the cylinder from one end and announced a 
bristling formula for what he saw; then he viewed it from the 
other end and evolved another formula; then he squinted at it 
sideways and got still another. 

"Now," he said, gesticulating wildly, "you multiply for- 
mula A by formula B, subtract C from the product, divide the 
remainder by C plus B and here's the answer." Striking an 
expectant attitude, he inquired, "What do you think of it?" 
One of the visitors, the manager of a machine shop, who had 
shrunk more and more into himself as the demonstration pro- 
ceeded, remarked meekly: "That's fine; but what's the use of 
it?" Shaking his fist in the air, the mathematician retorted: 
"You idiot, it hasn't any use; that's the beauty of it." 

The real beauty of a cost system, however, lies in its having 
a use. When an automobile company finds that each car is 
taking $90 worth of brass, when $80 worth would do, its cost 
system is surely at least worth $10 a car. If the costs show that 



138 



HOW TO FIND FACTORY COSTS 



tfln ongEft mi 


















. DESCRIPTION 


FINISHING DEPARTMENT . 






















| m 




1TYPE 


2TVPE 


3 TYPE 


EXAMINING 
TYPE 


TISSUE 


EXAMINING 
PRINTING 


PRESSING 


COUNTING 


TRIM 






R 




































' ■— i '"~f 








































TOTALS 




































J 












































| 






MATERIAL 


1 MONTH 




STEAM 
NUMBERING 


NUMBER 
EXAMINING 


BINDING 


PADDING 


PACKING 


TOTAL 


BINDING 
MATERIAL 








J 


R 




































T 1 



























































P^ 




















TOTALS 
























1 






















































FORM 37 
Here is the form on which the finishing department accounts for each sheet of paper which has 
been used on a special job. This record, of course, must correspond with the number of sheets 





DATE 


GQ0D5 


LOT 

no! 


WEIGHT 


COST 


BREAKING 


UNHAIBIM5' 


FLESHING 


PRIZING 


LIMING 
MATERIALS 

AND 
GEN. LABOR 


SETTING 


















































































1 




























































































■ 





















































































































FORM 88 
In this "first costs** book, as described by Mr. Staynes on page IJfi, the clerk enters the preliminary 
costs. By giving each lot a consecutive number, track is easily kept of the various lots, This book 



COST ANALYSIS 



139 



OFV 


fORK. 

BESU 




II 


'•- 


FINISHED . 




18* 




' 




king 


SIZING 


RULING 


MEASURING 


R0ULETT1N6 


GUMMING 


PERFORATING 


TISSUING 
STAMPS 


HAND 
NUMBERING 


II T ° m 1 


■ 














— ~ 


















=j=U 


=t— 














-H-+ 
















+- 






■* 










* 










TOTAL 












MACHINE 
COST 


DEPARTMENT 

BURDEN 


GENERAL 
BURDEN 








1 










1 




























j 










4- 






























1 


















— TT"~ 




T * 




























1 1 i 


I 





FORM 37 

which were originally secured from the storeroom. ' In connection with Forms 35 and 38, it is 

designed to show the entire history of the work on each job handled in the factory. 





REDUCTION 


DRESS 


NOURISH 


DRUM 
AND 

LABOR 


HOOKING 


TUCKIN6 


STAKING 


. classification, na 1 criRst 




































1 








' 












1 




















1 




















1 




















































































^_^ . ""*'".. 




















T" 




















8 









FORM 38 
is ruled across two pages and makes provision for suck entries as: the date received, the descrip- 
tion, the lot number, the weight, the cost and the first thirteen stages of production. 



140 HOW TO FIND FACTORY COSTS 

a material costing $160 is used in each car, when another mate- 
rial costing $30 would do just as well, the cost system is worth 
at least $130 a car for this service alone. 

A cost system constructed with sufficient minuteness and 
detail will call attention to just such facts, provided the man- 
agement studies the costs and reads them intelligently as they 
come from the accounting department. Two things are 
required: first, that the costs be detailed and accurate; second, 
that the manager treat them as an integral part of the business 
and make them serve the purposes of the business as definitely 
as the labor he hires. A perfect cost system in the hands of an 
unobservant or unintelligent manager is useless and expensive. 

If your system shows that thirty per cent of your stock is 
of a kind which depreciates at the rate of fifty per cent per 
year and induces you to clean out that thirty per cent as quickly 
as possible, it may be worth to you the difference between pros- 
perity and bankruptcy. And here again you must get facts 
that are real facts and act on them with judgment and 
decision. 

A COST SYSTEM IN THIS AUTOMOBILE FACTORY MADE POSSIBLE A 
DIFFERENCE OF $240 IN THE PRICE 

The cost system in one automobile factory that enabled the 
management to cut off an even $240 from the price of one of its 
models, was a comfort both to the manager and the consumer, 
for both gained thereby. A good cost system thus has its bear- 
ing on the fortunes of our old problem, "the high cost of 
living." 

It takes as much judgment to know when to stop doing a 
thing as when to do it. A system of records which is indis- 
pensable at one time and for one purpose may be no longer 
needed when that time has passed and its purpose has been 
fulfilled. 

In most places a cost system, once developed, should be 
maintained ; but there are plants in which it may be discontin- 
ued once it has established the cost of the product made. In a 



COST ANALYSIS 141 

pottery factory, for example, manufacturing the same line 
year in and year out, getting its materials at the same price and 
able to account easily for variations in labor cost, once the cost 
of a line is determined, the system may safely be allowed to 
fall into disuse, retaining only so much of it as might be neces- 
sary to ascertain the cost of a new line, if such should be 
taken on. 

The conditions under which such a policy would be safe are 
rare, and the best rule, when in doubt, is to keep your cost 
system. In any action to abolish it, the burden of proof is on 
the alleged exception. 

From all of which you will see that it's a case of using your 
own judgment as a business man when it comes to costs. I have 
simply endeavored to explain in this chapter, and the preceding 
ten chapters, some of the facts involved in the hope that this 
explanation would help you in forming your judgment. We 
will now turn to descriptions of two specific cost systems by 
officials of the concerns using them, and thus close the book. 



XII 

A COST SYSTEM THAT 
SAFEGUARDS 

By Warren L. Green 

President, The American Bank Note Company. 

That absolute accuracy in checking the work of special 
manufacturing is necessary to the continued success of a busi- 
ness, is now a generally accepted fact. How this methodical 
checking is carried through all operations in turning out a single 
job in one plant will be described in this chapter. 

All stock is carefully watched. Not only must all ink be 
accounted for by requisition, but paper, too, is subject to the 
same conditions. Paper stock is obtained from the storekeeper 
on a separate requisition (Form 29) and one form is used for 
each job order. The issuing room's tally appears from day to 
day as a record (Form 30) of "goods" and "bads" — the "bads" 
are held until the completion of a job and then incinerated 
upon a written order (they refer to valuable securities and 
must be carefully destroyed) . Nothing yet devised will enable 
an employee to explain a discrepancy between the number of 
sheets delivered to him and those returned. 

This factory habit of accuracy becomes ingrained. "How 
many have you got?" was the unconscious inquiry with which 
some of the forms represented here were handed to me by an 
old employee whose life had been a constant drilling in account- 
ability. Even stock forms had value in his eyes. 



A TYPICAL COST SYSTEM 143 

Bond work of this kind is usually "tissued" to prevent off- 
setting, and experience has shown that a uniform handling in 
lots of one hundred means simplicity in verifying, because 
checkers become accustomed to that fixed allotment and are 
more apt to note discrepancies when the total in any one pile is 
supposed to be the same. So the issuing room sends the job out 
on each successive day made up in that way. The odd sheets 
are held till another allotment of one hundred is ready. 

From the printing department the work with the pressman's 
record goes to the finishing room where the perforating, num- 
bering, trimming, binding, folding and other final touches are 
added. Here is the ultimate check on all departments. Every 
detail of the order is compared with the product to see if 
instructions have been properly carried out. The last tally is 
entered on a permanent record (Form 31) which must balance 
with the original requisition on the storekeeper for paper. 

THIS IS THE ULTIMATE TEST OP A 
GOOD COST SYSTEM 

"Has the job paid?" This routine of counting, sorting, 
checking and watching must crystallize on the factory man- 
ager's desk in profits or the tedious labor is lost. 

The neat-looking envelope in which the cost accounting 
department has summarized the job in figures may have 
stamped on its face a red star, which means: "Done at a loss." 
There is no getting away from the figures. They are analyzed 
at every step. This record of costs (Form 32) represents the 
result of two years' work given over to gathering data on 
machinery, materials and labor. 

When the pressroom ordered its ink for the bonds on which 
the profit or loss now appears, the exact cost was determined 
on a blank (Form 33) which showed the direct and diffused 
labor, as well as the materials (oils, varnishes, dryers, and so 
on) , used to produce every pound of it. 

In the business of engraving, the ink may vary with every 
job and only by careful records is it possible to determine the 



144 



HOW TO FIND FACTORY COSTS 



GOODS 


STAKING 


GROUNDERS 


WHEELS 





DATE 


LOT 


DESCRIPTION 


FROM 
BLEACH 
OR DYE 


RUN 
OFF 


PARING. 

GROUNOING, 

CLEAR'G. 




| 


S.ANDB. 
IN COLOR 


FACING 


FIRST 
COLOR 


FINISH 


GRAIN 

OR 
FLESH" 


BLEACH 
AND 
WASH 


















































































































































































































































































































































































































> - 







































































































FORM 40 
Here is the arrangement of the "finishing cost" book described by Mr. Staynes on "page 11$. 
When hides are wanted immediately, they are posted to this "finishing cost" booh. If not imme- 



.EXAMINED BY 

, , FOREMAN 


0, K. BY 


CHECKED BY 


CHECK NO. 




PAYROONO. 












TsfvlE REPORT 

OF, 

WEEK ENDING 19 


Ty»r 




USE SEPARATE SHEET FOR EACH JOB. 




>lSUm,CUTTIN6.AN0 MAKING 


s 


s 


M 


T 


w 


t 


F 


TOTAL 


















2. DUCTS, ERECTIN6 


















3. FAN AND ENGINE 








1 








4. FAN CHAMBERS 
















5. VOLUME DAMPERS, MADE AND ERECTED 


















.6. AIRWASKERS. 


















7. REGISTERS 


















8. DAMPERS, MADE AND ERECTED 


















ft VENTILATORS. 


















10. FLUES 


















11. PAINTING 


















12. TESTING. 


















13. MAINTENANCE 


















14. ADDITIONAL WORK 


















15. 


















TOTAL HOUR 


5 


RATE 


$' 




? 















FORM 43 
The use of this card, with Form M, furnishes a positive indication of relative costs of installing 
various grades of fixtures. 



A TYPICAL COST SYSTEM 



145 







SUMMARY 




COLOR 
AND 
DYE 




QUANTITIES 


CRUST OP. 
TO HERE 


FINISHING 


OVERHEAD 
CHARGES 


TOTAL 


YIELD, DISPOSAL, ETC. 
















































































































































































































































































































































LJ — 1 




















_____ ■ 







































FORM 40 

diately required, they are posted to the "crust stock book." The production then stops until the 

goods are required, when they are posted to this "finishing stock" book. 



EXPENSES 

AMOUNT 


RAILROAD FARE TO C_L_^_^tr6L_W_l 1\ U, 


2- 


HO 


BOARD AND ROOM ' • 


Z- 


r» 


SALARY AS PER OTHER SIDE 


!_>" 


oo 


OTHER EXPENSES 

WHAT BOUGHT WHAT FOh 





















































































FORM 44 

This form is the reverse of the card shown in Form J/.3, and completes the information required 

regarding costs of installing various grades of fixtures. 




IN; A CENTRAL TOOL ROOM 

The tools are kept carefully sorted in racks at the Pullman Company's plant, and 
there is a special method for checking on those which must le returned after the 
men are through. Instead of sharpening their own tools in a distant tool room, 
the men receive sharpt ools for dull ones at their work-places. This feature alone 
has resulted in an attractive saving 



A TYPICAL COST SYSTEM 147 

cost per thousand impressions for any one run. Ink is an 
expensive item in high-grade work, especially so in printing 
from steel plates. For example, in printing two hundred and 
ninety thousand bonds composing a loan of the New York, 
New Haven & Hartford Railroad, twenty-seven tons of ink 
were used, or more than twice the weight of the bonds them- 
selves. The reason lies in the process of plate wiping, familiar 
to engravers, by which only a small portion originally applied 
remains to bring out the impression. 

Careful records must be kept of every press and of every 
worker at the press, for the amount of ink employees will use 
varies on the same press. 

CAREFUL RECORDS SHOWED THAT THE INK USED ON A PRINTING JOB 
WEIGHED JUST TWICE AS MUCH AS THE PAPER! 

By comparing these figures, by letting the pressmen them- 
selves know and comment on them, much can be done to econo- 
mize. In the form as finally perfected, account is taken of the 
manner in which the ink is ground and mixed, the proportions 
of oil, varnish, dryers and miscellaneous coloring-matter enter- 
ing its make-up, and the machine on which it is run, and other 
factors calculated to show exact costs and results. These are 
summarized on one section of the form just described and for- 
warded to the cost accounting department (Form 34) . 

The time checks of each employee, showing department, 
name, job, number, pay an hour and number of hours 
employed, are likewise assembled, classified and recorded by 
the cost accounting department on forms (Forms 35, 36, 37) 
designed to show the entire history of work on each job handled 
in the factory. 

From these forms are taken the summarized figures that 
are laid on my desk each morning in connection with jobs on 
which delivery has been made. 

In the final cost as there shown, is included both the depart- 
mental and general "burden." These are figures for each 
month and the percentage of cost for the month in which a job 



148 HOW TO FIND FACTORY COSTS 

was done is included with the cost of that job. The burden of 
repairs to buildings, taxes, insurance, lighting, depreciation, 
water, superintendence, indirect labor and material in each 
department, is a part of that department's burden. Taxes, for 
instance, are apportioned in accordance with the floor space 
each department occupies. 

To the general burden is assessed the cost of operating 
the storekeeper's purchasing and experimental departments, 
together with general administration expenses. 

WHAT AN AUTHORITY SAYS ABOUT GETTING COSTS 
ON FINISHED MATERIAL 

Following is quoted some allied material about costs, pre- 
pared by W. H. Staynes : 

"To get costs on finished material that has required a score or more 
different processes presents accounting difficulties to every manufacturer. 
This is especially true of leather finishing where the product is handled 
in bulk, for the most part, and usually involves two dozen or more distinct 
operations to complete it. 

"The records used in one large tannery for following work through every 
step involve an excellent system of daily postings and cost summaries. 
The system has been in use for a number of years and has proved of vast 
service in providing against losses resulting from wide fluctuations in the 
price of raw material. It offers suggestions for many other businesses. 

"Production cost records are carried in a series of bound books and 
workmen's individual time sheets. The posting begins from the moment 
a load of raw hides is received and classified. These preliminary costs are 
entered in the first costs book (Form 38) by lots, each lot taking a consecu- 
tive number. This book is ruled across two pages and is provided for 
such entries as : date goods received, description, lot number, weight, cost 
and the first thirteen stages of production. 

"The exact cost for each process is secured and entered daily by means 
of the time sheets (Form 39) which the workmen are required to leave at 
the office each evening after finishing their day's work. These sheets, like 
all the other records, provide for entries by lots, as the leather is handled 
in this way entirely. 

"The workman merely indicates on his sheet the amount of work done 
and time required. The rate, amount and charge are filled in at the office. 

"Each morning the clerks take the time sheets for the previous day and 
enter the costs in the proper columns of the first cost book. For instance, 
the first process is 'breaking.' Workmen's time sheets show the cost of 
the process for a particular lot and it is entered in the proper column. The 
next time sheets will total the cost for the next process 'unhairing,' and so 
on through the various stages until the lot comes out as 'crust stock.' The 



A TYPICAL COST SYSTEM 149 

leather is then classified and the sum of the costs of each process gives the 
total cost of the lot, which is entered in the last column of the book. 

"Hides wanted immediately are posted to the finishing cost book (Form 
40) but if not immediately required, they are posted to the 'crust stock' 
book (Form 41), which gives a complete record of all 'crust stock' in hand. 
The production then stops until the goods are required, when they are 
posted to the finishing stock book. 

A GOOD EXAMPLE OF HOW COSTS ARE SUMMARIZED 
AND BROUGHT TOGETHER 

"Into this book the totals of finishing costs are posted. As the finishing 
may be different for different portions of a particular lot, the lot numbers 
may have to be added to, so as to indicate the part of the lot being dealt 
with, in which case the previous 'crust cost' is averaged over the different 
sections of the lot before posting to the finishing cost book. In this book 
all work from the completion of 'crust stock' to actual finished hides is 
covered. 

"The two sections of cost, 'crust' and finishing, are then summarized, 
the overhead charges added, and the total cost obtained. The finished 
hides then go to the warehouse, and are posted to the finished stock book 
(Form 42) ; the number of skins, total area, and cost are entered. As sold 
they are entered on the opposite side of the page, with area and selling price. 
As these hides are of a high-class character for special work, they are sold 
by the square foot, and the area is therefore an essential feature of the 
costing. 

"In other classes of hides sold by weight, the weight would take the 
place of the area entry, with the same result. The advantages of such a 
production cost system are at once apparent. For the costs of a given lot 
of raw material are not only followed through the yards, step by step, but 
the costs by stages serve as a constant index to the efficiency of every 
department and each individual workman of the organization. 

"Thus a manufacturer using a system like this is enabled to locate 
instantly the cause of any departure from normal cost and is assured at all 
times that the margin between the cost and selling price of any given lot is 
sufficiently large. A weak link in any one particular process may result 
in a loss on the whole. But by this method the weakness is detected the 
instant it appears and can be rectified before it does harm. 

"The system has the further advantage of being handled with few forms. 
This element of cost keeping is a vital one, for it makes less possible mis- 
takes that might occur with a more elaborate system and reduces the labor. 
Many other advantages of the plan will be found in using it. For some 
businesses additional features for handling costs might be developed." 



XIII 

MAKING COSTS AND BIDS 
AGREE 



By H. A. Harris 

Secretary-Treasurer, National Regulator Company 

I am not a theorist, but a technical man, and I have found 
it necessary to have a cost for these five reasons : 

First, to give me a record of operations so that the progress 
being made on a building may be observed and a satisfactory 
profit insured; 

Second, to prevent a loss on any one section due to igno- 
rance of conditions ; 

Third, to keep men from "laying down" on any one branch 
of the work; 

Fourth, to govern prices in the making up of future 
estimates ; 

Fifth, and finally, to record such salient facts as will be 
necessary for future reference. 

Two instances will show the vital importance of knowing 
the cost of work. 

One concern had no cost system. Bids for this concern 
were prepared by a "practical" man who professed to know 
cost's. A quotation had been submitted on a large office build- 
ing, and for several reasons the company was the logical one 
to do the work. It was selected from among the other bidders 
and given the preference by the owners. 



COSTS AND BIDS 151 

However, the officials were told that their bid was too high. 
They were asked to cut the price by about $5,000. The esti- 
mator went over the figures carefully and finally decided it was 
too much of a risk. He believed that taking the work at the 
lower price would probably entail a loss ; so, after several con- 
ferences, the contract was passed up. 

THE INSTALLATION OF A COST SYSTEM SHOWED WHY THIS COMPANY LOST 
A PROFITABLE ORDER BY BIDDING $5,000 TOO HIGH 

This company later installed a cost system. When suffi- 
cient data had been secured to govern future quotations, a cost 
was prepared on this particular building. It was then found 
that the price originally submitted was unreasonably high ; had 
they accepted the contract for the amount named by the own- 
ers, they would have made a splendid profit. The building was 
a representative one at the time it was built and has since had 
additions made to it ; so that the loss due to refusing the original 
contract was not the only one entailed. 

A second incident will show the other side of the question. 
In my own experience I prepared a quotation on one of the 
largest office buildings in the middle west. The conditions were 
practically the same as in the illustration previously mentioned, 
except that I was asked to make revisions in the figures on 
account of certain changes in the plans, and with a view to 
lowering the figure sufficiently to obtain the work. I had a 
splendid record of costs upon which to base the original quota- 
tions and it required only a few adjustments in the estimate to 
bring it in accordance with the changes. The business was 
secured, and after the work was completed, I checked the 
finished cost against my original estimate and found that there 
was a variation of only one-half of one per cent. This I con- 
sider close enough for all practical estimating purposes. 

After many years in this line I have developed an unusually 
efficient and satisfactory method, and by varying it to meet 
special requirements, it is applicable to the smallest as well as 
to the largest business. It is the system I am now using. 



152 



HOW TO FIND FACTORY COSTS 



NO. 

PAY 

WEEK ENDING 19 


EMPLOYEE 


REMARKS 


NO. 


RATE 


LABOR 
OUTSIDE INSIDE 































































































































































































































































































































































































































































FORM 45 
This is the payroll record. When the -payroll is made up at the end of the week, the time reports 
should be entered thereon by name and number. The number may be given to a man permanently. 



CLASS 


■ 


NCS. 


CHARGE 




FOLIO 


TOTAL 




























■ 
























































































































- 
















































































































































































































































„-^ r^r-^r- 




— =^^^^=Z 












































; 




















I 





FORM 46 
This form is the reverse of the payroll sheet shown above {Form £5), and is used to classify the 
information received on the reports turned in. The reports are sorted and entered by buildings, 



COSTS AND BIDS 



153 



ROLL 


EXPENSES 




TOTAL. 


AMOUNT PjUD 


' CHECK NO. 






















1 














































































































r\ 


























L^— 












































































































■ 






















- —^ *«- . — 






















































FORM 45 
or a new number may be assigned each week. When there are less than three hundred employees, 
it is much easier to enter the reports as they are received, if new numbers are assigned weekly. 


IfiCATIQfc m 

"WEEKENDlNiJ 1915 


CONSTRUCTION 


GENERAL 


MAINTENAh 


CE ADJUSTMENT 


REPAIRS 


F. TOOLS 














































1 






1 






































































































































































' 




































































































































































































































































































































































































































































































































































































































































































1 




















<^ 




•* — 














































































































































' 


< 



FORM 46 . dCJ 

numbers of the men now being used to indicate the workmen whose reports at: Aed in 

each charge. A glance indicates to what ledger classification they are to be pc .^.ed. 



154 HOW TO FIND FACTORY COSTS 

To obtain construction costs properly, the material as 
shipped must be charged against the building. The practice in 
vogue with many contractors is to enter material only when it is 
paid for, the entry coming direct from the cash book. This is 
absolutely wrong, as it does not give the superintendent watch- 
ing the detail the true state of conditions; nor does it allow the 
material not entered to be taken into consideration when billing 
the owner as the work progresses. Not entering the material 
as it is shipped to the building understates the investment, and 
is misleading to one observing the construction operations. 
The equity, which should appear in every financial statement, 
is also incorrect. The understatement will probably "fool" the 
contractor into a false idea of the profits being realized, and I 
have known it to result disastrously. 

HOW ONE MAN DEVELOPED AN UNUSUALLY EFFICIENT AND 
SATISFACTORY METHOD 

If material is not entered as deliveries are made to the 
building and any disputes should arise, causing the bill to be 
held up, it might be months, or even years if litigated, before 
the bill is finally entered in the investment. I have heard many 
complaints voiced by auditors, surety companies, and financial 
guarantors, ac to the difficulty experienced in determining the 
investment on a building where this extremely inadvisable and 
uncalled for method was practiced. 

A cost that is broken up into the various classes — showing 
labor, material and other divisions of the investment at a 
glance, — produces the best results. I have seen bookkeepers 
who were compelled to spend three or four days analyzing ao 
entire account, when labor or some other item was required. 
Should this occur during a rush period, it would place unneces- 
sary hardships upon the accounting department. 

Dividing the cost also allows the official in charge to watch 
thf ogress being made on each section of the building; and 
when, ^^idered in connection with the construction reports 
submitted by the foreman weekly or at other times detailing 



COSTS AND BIDS 155 

the work, this method provides all the information necessary in 
guiding the operations. It may also eliminate a loss which 
would otherwise not be discovered until it was irreparable. 
The superintendent knows from the condition of the detailed 
cost, and the foreman's report, when a portion of the work will 
probably overrun the estimate; and by instituting vigorous 
methods at once, the cost is kept down, thereby overcoming 
what otherwise would have been a ldss. I do not mean by this 
that losses can always be overcome, but many are incurred 
which could have been entirely prevented or greatly lessened, 
had there been some intimation that the work was costing more, 
or would probably cost more than it should. 

DETERMINING THE RELATIVE EFFICIENCY 
OF TIME UNITS 

By watching the detail, I have found that superintendents 
will be valuable on some classes of work, while they will lose 
money on others. The cost system points out the strong and 
weak qualities of the men, and allows them to be placed in their 
most efficient field. A cost system of this nature has a stimu- 
lating effect upon the workmen, also, for they soon learn that 
there is an automatic check upon their labors, and that it will 
be impossible for them to hold their positions unless they work 
up to their best ability. 

The labor or time is therefore the first consideration for the 
cost system. It' is not difficult to obtain the material and break 
it up into its various classes, provided it is properly handled; 
but it is not so easy to obtain the time, correctly classified 
according to the various divisions. 

I have used a classified time sheet for the past seven years 
and in my experience I have never had the least criticism as to 
its effectiveness. I do not ask the men to classify the time down 
to the minute, as that is impracticable for the average build- 
ing workman. Moreover, I have found that a "fairly accu- 
rate" division of the day's work is sufficient for a practical cost. 
A little "give and take" will induce the men to cooperate better 



156 



HOW TO FIND FACTORY COSTS 



m &tpt 


_,158NTRACT 
























«SW«S 


jl 


KTRft 


nwraACTwmi 


Mfflfff?* 


aRpfflT^CT ....„>.., ENGINEER 


£w»bw^ M?M«flpiicH) rnMPinm agfwt 


*' r 


ITCMM < 


RMH1 ISSUED YFARftMAUIT 


EXPIRES R^tocoiernFiFD 




wwtwTt ' * ,. «,J 










| CONSTRUCTION ACCOUNT 


1 ITEM 


8 

BATE I BOOK 


PAGE| SUNOS. I EXPENSES 


HOURS 


LABOR 




Fff. 


HLPR. 




1 










8 














1 
















































































































































































































































































































































































' 


















































































































































































































































































































































































































































































1 ii 










-- 

















FORM 47 

Here is the "primary" ledger sheet. This is the main ledger sheet carrying two separate accounts: 
a summary of the construction account, which shows the investment and earnings on the building. 



COSTS AND BIDS 



157 









EST. v N0. ESTIMATE DATE 


9 


QUANT. 


ITEMS 


PRICE 


AMOUNT 












$ 




















































































































^N . 




CONTRACTOR 


1 ^ 


MATERIAL 




DEBIT 


CREDIT 


BALANCE 




DEBIT 


CREDIT 


BAIAH 


CE 








































































































































































































. 


























































' 
































































































































































































































































































































* 




































































* — 





























J 1- 












■ 








' — 















, 




-— 




' 


r 




1 














I 








1 




■ 


1 


, 




J „...I... 


1 






[ itx:::i.xi.. 


, I , , , . JL.. 





FORM 47 

and the contractor's account. This style of sheet is extremely effective when more than one 
contract is carried with the same company, as the accounts are necessarily kept separately. 



158 HOW TO FIND FACTORY COSTS 

than if they are held absolutely to the minute. They know that 
the office is in possession of a wide range of cost data and it 
can not be deceived by a slight variance on any one branch of 
the work. 

Some workmen can not write well and many foreigners are 
employed who can not read nor write our language at all. For 
such men the time reports can be made out by the superin- 
tendent or timekeeper. They are seldom employed as fore- 
men; but in case they should be, they will have someone else 
make out the time carefully for them. They will not jeopar- 
dize their chances of steady employment by having the time 
wrongly or inaccurately classified, and therefore subject to 
investigation. 

THE NECESSITY OF ELIMINATING VARIATIONS IN REPORTING TIME 
BECAUSE OF DIFFERING PERSONALITIES 

At the time the classified report was put into operation I 
was informed by all with whom I talked that the sheets would 
never be filled in accurately. I was told that the men would 
intentionally mis-classify their time, and the attempt would 
have to be discontinued. It was pointed out that our competi- 
tors had tried the same plan, but owing to the lack of coopera- 
tion on the part of the men and their failure to divide the time 
correctly, it was unsuccessful and had to be given up. In the 
beginning I myself encountered several instances where the 
men intentionally mis-classified the time in an endeavor to dis- 
courage me and do away with the report; but in each case the 
attempt resulted directly to the workman's disadvantage. 
When a class of work on any building showed an excess in 
time, an immediate investigation was in order. After the men 
found that the results were being carefully watched there was 
no more trouble. 

The time report (Forms 43 and 44) carries full details, 
covering not only the workman's salary, but also his expenses 
and sundry purchases. The report must be signed by the 



COSTS AND BIDS 159 

employee and approved by his superior, making it a complete 
voucher. 

While the labor cost in dollars per unit is necessary in 
supervising the work, there should also be a cost in hours. 
Where the trades have both journeymen and helpers, the hours 
should be divided accordingly. The hour unit is advantageous 
in figuring buildings in different localities, since the labor 
should be consistent in hours but may vary in rate. Thus the 
hour basis is the only practical method of reaching an accurate 
result in supervising operations in new territory. The divisions 
on the cost records, therefore, should include the hours of labor 
as well as the cost of labor, in order to obtain standards. 

SIMPLIFYING THE RECORDING OF TIME REPORTS 
ON THE PAYROLL 

At the end of the week when the payroll (Form 45) is made 
up, the time reports should be entered thereon by name and 
number. The number may be given to the man permanently, 
or a new number may be assigned each week. If there are less 
than two hundred or three hundred employees I prefer the 
latter method, as it is much easier to enter the reports as they 
are received, one below the other. Furthermore, separate 
reports are used for each building upon which time or expense 
has been put in, and where an employee has been working on 
several contracts during the week, his entries on the payroll 
will take more than one line. If the lines are numbered con- 
secutively and assigned permanently, confusion will result. 

On the reverse of the payroll sheet (Form 46) I have spaces 
ruled into sets of three divisions each. The latter are divided 
by very faint lines so as to facilitate simplicity in entering. 
The three divisions indicate, respectively: labor; expenses; 
material. 

The reports are sorted and entered by buildings, the num- 
bers of the men now being used to indicate the workmen whose 
reports are included in each charge. This facilitates future 
reference in searching for information, audits, and so on. The 



160 HOW TO FIND FACTORY COSTS 

amounts from the reports are placed in their proper divisions, 
indicating at a glance what classification on the ledger they 
should be posted under. 

As checks are drawn or cash payments made to the men, the 
check numbers and the amounts covering these disbursements 
are entered on the payroll, and since both the total amount to 
be paid and the payments made should balance, discrepancies 
are prevented. 

WHY IT IS EASY TO KEEP A CLOSE CHECK ON CONTRACTS 
UNDER THIS SYSTEM 

Each contract received is entered as an account and num- 
bered consecutively. The accounts are carried in the current 
ledger, and may be arranged in numerical order or alpha- 
betically by cities. 

The index of the ledger is kept on cards, one card being 
made out for each contract. These are filed geographically. 
A city having a number of contracts has the cards filed under it 
subdivided according to the various classes of buildings. Thus, 
the buildings in any one section of the country are all grouped 
together, a grouping which is of great assistance in inspecting 
and referring to work already installed. 

After the contract is entered, it is glued in a manilla folder, 
nine by fifteen and one-half inches in size, which is given the 
account number and filed numerically in a document case in the 
vault. All important papers that develop on the work, such as 
copies of the bond, extra orders, special agreements, and others, 
are glued in the same folder with the contract. 

Current correspondence is carried in individual folders filed 
alphabetically by cities. After the contract is finished and paid 
for, the letters are arranged chronologically. The folders are 
filed "dead" by the account number. Plans and specifications 
are also carried by this number in their respective live and dead 
files. 

The account number is really the contract index or "in- 
former/ ' hence is the key to all files contingent upon the work. 




SIMPLE BUT EFFECTIVE 

Each man has a numbered piece of brass which he receives as he passes into the 
yard and which he hangs over the proper square in a box like this when he reaches 
the section of the Pullman Company's plant in which he works. The brass 
pieces are deposited at the gate by the men as they leave. A glance will show 
whether or not all the men are at work 



162 



HOW TO FIND FACTORY COSTS 





TERMS OF PAYMENT 




SUMMARY OF 


r\_ 


NO. INSTALLED 


LABOR EACH 


MATERIAL EACH 


















































kJ 










IRON 
GAUGE WEIGHT 


MATERIAL 


LABOR 


HOURS 


UNITS MATERIAL 


LABOR 


HOURS 


UNITS 


MATERIAL 


F. 


H. 


F. 


H. 



































































































































































































































































































































































































L.LL 






-=- 

























-t 


fF 


fff 










-4= 


























































± 


































±" 




































































1 










. 















FORM 48 
Here is the "secondary" ledger sheet, which contains complete, classified details of the cost, entered 
as the work proceeds. It is used entirely to check on the detailed costs. The headings are filled 



O ORDER O 

CAUTION: USE ONLY COLUMNS AND LINES DRAW ALL SKETCHES AND WRITE 
MARKED BY STAR. USE NO OTHERS. ALL REMARKS ON BACK 


* SHIP T 

*CARE 


1 


SHIPMENT NO. . 
DATE SHIPPED. 
PACKFD RY 




ORDF 


NO. 
FNTT 










DATE 






* BUILDIf 

* STREET 

* CITY 


G 




thfir nnnFR Nn 




B. 0. NO. 


INVOICE NO. 




a 0. FROM NO. 




O.K.E 


Y 0.1 


LED 


RFR 




■fc VIA 


A- WHEN 


SHIP 










• date 


ir contract * ordereo by 




SHOP 
ORDER NO. 


REQO. 
NO. 


PACKERS 
CHECK 


• 
CLASS 


• 

QUAN. 


• 

ITEM (CLASSIFY EVERY ITEM) 




PRICE 


EXTENSION 


LIST OF CLASSES. 


1. DUCTS, CUTTING AND MAKING 

2. DUCTS, ERECTING 

3. FAN AND ENGINE 

4. FAN CHAMBERS 

5. VOLUME DAMPERS, MADE AND ERECTED 

6. AIR WASHERS 

7. REGISTERS 

8. DAMPERS. MADE AND ERECTED 

9. VENTILATORS 

10. FLUES 

11. PAINTING 

12. TESTING 

13. MAINTENANCE 

14. ADDITIONAL WORK 
15. 










































































































































































































B 












1 

ne 

i 

1 

ee 

1 

a 
t- 
z 










































1 




















































s 

o 


1 1 




e/ 












































5* 






















S 


!7 









FORM 49 
Material from the warehouse is requisitioned on an order blank like this, which lists the 
classifications of the costs and carries a column in which the number of the class may be indicated. 



I 



COSTS AND BIDS 



163 



COMPLETED CONTRACT 



ERECTION EACH 


TOTAL ERECTION 


HOURS EACH 


HOURS TOTAL 


F 


H. 


F. 


H. 











































































SHEET 

CONTRACT 




FORM 48 

in as the work progresses, since different contracts are seldom advanced in the same order of 

operation. This keeps the cost compact and easily handled. 



HOW.THE EQUITY ISJIGURED 



INVESTMENT 



1.- MATERIAL NOT INSTALLED. 

Z- MATERIAL INSTALLED 

i -LABOR 

4.- 



PROFIT EARNED f 1-PARTIAL ACTUAL PROFIT TAKEN AT CLOSE OF PREVIOUS YEAR ON CONTRACTS STILLiN FORCE 



JFIT EARNED fl- 
ONTHE \ 
[VESTMENT l 2_ 



INVESTMENT [ 2 ~ ESTIMAT£D FR0FIT FR0M BEGINNING OF YEAR LESS ACTUAL PROFIT ON CONTRACTS SO FAB CLOSED IN PRESENT Y£AB 



THE SUM IS PORTION OF CONTRACTS COMPLETED^ 

BILLED 



THE DIFFERENCE IS -'EQUITY OR UNBILLED PORTION OF CONTRACTS SO FAR COUFlOfp 



FORM 50 
The equity is an important factor for the contractor to have in mind when figuring out the actual 
condition of his business. This chart illustrates how to obtain the equity on any contract. 



164 HOW TO FIND FACTORY COSTS 

Ledger sheets upon which the contract is entered, besides 
carrying the accounts and the cost, contain the following 
information : 

The entries which are to be made on the general books to the various 
controlling accounts may be expressed by a simple series which I will now 
give - in practice they may be somewhat further subdivided: 

Account and contract number 

Name of building and its location 

Name and address of the party contracting 

Amount of contract and extras 

Terms of payment 

Architect 

Engineer 

Estimate of detailed cost, upon which work was taken 

Salesman and his commission 

Date of award 

Date of commencement of work 

Date of completion of work 

Detail of bond 

Summary of cost at completion 

Sundry remarks 

And is complete with check columns, "forward" lines, and so forth. 

The main ledger sheet (Form 47), hereafter designated as 
the "primary" sheet, carries two separate accounts, as follows: 

(a) The construction account, or the investment and earnings on the 
building. The investment is divided into 

Material 
Labor 

Hours of labor for the journeyman and his helper 
Expenses of the men, freight, drayage, and so forth 
Sundries, as commissions, bond premium, and other items chargeable 
to the contract 

(b) The contractor's account, which is the personal account with the 
party who has let the contract, covers the following amounts: 

Billed 

Paid 

Due 

The investment, or debit, is kept "pure." By that I mean 
any adjustment of labor, returned material, overcharges, or 
other contras, instead of being credited, are entered in red ink 
in the debit and its divisions, and subtracted. Hence the debit 
always represents the actual investment on the work, and every 
classification column is a corrected division of this investment. 



COSTS AND BIDS 165 

The credit of the construction account represents the earnings 
and is the amount billed. In this column profit and loss entries 
are made. 

Amounts billed are charged against the contractor in his 
personal account, and payments which he makes are credited. 
In some cases bills are rendered to others than the contractor, 
as where extra work is done for others, in case of damages, or 
where two or more contracts are running on one building and 
they are of such a nature that they can not be differentiated in 
the investment. When such cases occur, the construction credit 
records the total billed ; but the contractor's account will show 
only the account with the original contractor. Additional 
sheets are inserted as needed, or separate accounts are carried 
elsewhere, for the other parties. 

ONE RESULT OF HAVING A SATISFACTORY 
COST SYSTEM 

With my ledger pages open in front of me, therefore, I 
have at hand the entire book transaction on any contract; and 
until a building is finished, the profit taken off and the account 
paid, the detail is all at hand. This style of sheet is extremely 
effective when more than one contract is carried with the same 
company, as the accounts are necessarily kept separate and 
thus any possible confusion prevented. 

The amount of the contract is entered on the primary sheet, 
together with any extras that later occur. Where the contract 
entails many extras, the back of the sheet, which is plain, is 
used for these records. 

The "secondary" ledger sheet (Form 48) is the cost sheet. 
It is used entirely for the cost detail and is ruled on both sides 
in sets of columns, the sheet illustrated having six sets to the 
side. Each set contains four columns, with the following head- 
ings : units ; labor ; material ; hours. 

Each set has a blank box heading at the top, in which are 
written the divisions of the work upon which a cost is desired. 
The headings are filled in as the work progresses. Different 



166 HOW TO FIND FACTORY COSTS 

contracts are seldom prosecuted in the same order of operation. 
By providing for writing in the headings in this manner, there- 
fore, the cost is kept compact' and easily handled. The top 
margin on one face of the secondary sheet contains a summary 
of the completed work. The margin on the other side is 
reserved for general remarks. 

HOW ONE COMPANY HANDLES ESTIMATES ACCURATELY 
AND WITHOUT MUCH RED TAPE 

All estimates made by the estimating department or the 
men in the field are sent into the home office for checking and 
recording. Here they are given a consecutive number, indexed 
by a card system arranged geographically and filed "dead" by 
this number when disposition is made of the work. Until the 
work is awarded, they are carried in a current file by territories. 

When a contract is taken, the estimate that secured the 
work is entered on the ledger. If it is too large for the space 
provided, details of the contract may be written on the back of 
the sheet. A reference is made to the estimate number and the 
date it was made. 

There are many arguments both for and against this plan. 
The main argument against it is that clerks and others have 
inside information as to the figures, and this might leak out to 
competitors. This is true, but since each contract' is generally 
figured somewhat differently from any other, due to peculiar 
conditions, and since the basis of figuring is continually chang- 
ing, the estimates that are entered on the ledger are merely 
records of past prices, and will not serve any great purpose, 
even if given out. Therefore, this adverse argument is not 
very strong. 

The main reason in favor of entering the estimate is that 
in watching the work, it is the governing factor ; the standard, 
as it were, which is continually being consulted and used as the 
controlling lever in prosecuting the work to prevent loss. With 
this estimate on the ledger, discrepancies in present figuring 



COSTS AND BIDS 167 

standards, and variations in the cost as the work progresses, 
are discovered sooner than they would be otherwise. 

Costs on construction work differ from ordinary manu- 
facturing costs in that' they should not cany any burden, but 
should be the "pure" cost itself. Such items as telephone calls, 
telegrams, freight, drayage, and so on — costs that are directly 
chargeable to the building and can be figured in making up the 
original cost — are, of course, necessarily entered. But over- 
head expenses should never be included, although they should 
be considered in figuring the amount of profit. 

Where a company is doing work that is not of an absolutely 
local character, freight, drayage, transportation charges, 
expenses of men, and other items, while they are chargeable to 
the contract and are included in the investment, should not be 
included in the detail of the cost until the work is summarized, 
unless figured as a portion of some particular division of the 
work. The latter should, therefore, contain only the labor, 
material, and the units installed. Cost and investment must 
not be considered as one and the same, for the former is only 
a portion of the latter. 

THE IMPORTANCE OF PROPERLY CLASSIFYING EXPENSE ITEMS 
WHEN MAKING UP ESTIMATES 

In compiling figures for estimates or for controlling opera- 
tions on a building, items of expense should be considered sepa- 
rately and in proportion to the distance from the operating 
base. If these figures were buried in with the cost it would be 
a difficult matter to make cost comparisons or to estimate on 
buildings in different locations. 

Where the company, however, is doing nothing but local 
city work, then drayage and similar expenses may be charged 
directly to the correct classification, since all the buildings will 
be on the same basis as far as operating conditions are 
concerned. 

It must be borne in mind that the cost obtained is to be 
used for future quotations and that no items must be included 



168 HOW TO FIND FACTORY COSTS 

which arise from conditions peculiar to a restricted locality. 
There are exceptions to this rule, of course, and each company 
must take into consideration its own requirements and make the 
cost and its divisions conform thereto. 

THIS METHOD IS USED BY ONE COMPANY TO REQUISITION MATERIAL 
SHIPPED FROM ITS WAREHOUSE 

All material shipped from the warehouse of the company 
is requisitioned on an order blank (Form 49), which lists the 
classifications of the cost and carries a column, opposite the 
item, in which the number of the class may be indicated. 
Classifying the order in this way should be the task of either 
the clerk or the superintendent. 

The bookkeeper divides the material correctly on the sec- 
ondary sheet. If material is purchased and shipped direct to 
the building, instead of coming into the company's warehouse, 
the purchasing agent classifies the purchase order, as he should 
know the use for which the material is bought. If he does not 
know it, the superintendent may be called on for details. In 
checking bills, the clerk is now in a position to classify the mate- 
rial from the notations on the purchase orders, thus providing 
the bookkeeper with the proper information. 

Portions of the work on a contract may be sublet to other 
firms. A "subcontract" of this sort is covered by a purchase 
order. If necessary, this may be based on a formal contract. 
Bills rendered on this work are treated the same as a part ship- 
ment of material on a supply order and are charged to the con- 
tract' as received. Extras under this subcontract are handled 
by separate purchase orders. 

In posting the labor with its contingent expense, and the 
sundry purchases made by the men, all of which are detailed 
on the time reports, the bookkeeper posts the total amount 
from the payroll book. Each entry is divided into labor, 
expenses and material. 

The bookkeeper next refers to the time reports and posts 
the amount on each class, together with the number of hours, 




7^ 




r.%- 



WHERE SOME OF ONE PLANT'S COSTS ARE FIGURED 

When the Pullman Company decided to adopt a new system of management, 
which its president calls a "common sense" system, it frankly admitted that it 
wanted accurate figures to be used in making estimates. The situation was care- 
fully explained to the men and they did not object to the careful check placed on 
costs by the new plan 




_ ■ 



fcy:;^«*-- :::i «^ : - ; »«n3 ft 



lia^'ri&i^~ 




CUT COSTS DESPITE AN INCREASED PAYROLL 

77m is a section of the Pullman Company's brass department. In the finishing 
section of this department the Taylor system of routing is used. Despite the 
fact that this system increased the number of men required properly to supervise 
the work from seven to forty-seven, costs were reduced to an extent which entirely 
justified the increase 






COSTS AND BIDS 171 

directly to the cost division on the secondary sheet. The post- 
ing, therefore, appears in total under its division on the primary 
sheet, and is also broken up according to the various cost 
divisions on the secondary sheet. 

Bills rendered are posted to the credit of the construction 
account, and in the adjoining column appear as a debit of the 
contractor. This is true in all cases except where the charge is 
against another party. Double posting made in this way on 
the same line prevents many errors and holds the contractor's 
account in true accord with the contract. This method is far 
preferable to having a personal account with the contractor, in 
which the records connected with several buildings are jumbled 
together, 

SAVING ONE-THIRD OF THE BOOKKEEPING 
TIME IN BILLING 

In making out statements or billing as the work progresses, 
the contract amount, terms of payment, amount paid, and 
other necessary facts are conveniently at hand. This fact saves 
countless minutes that would otherwise be wasted in searching 
for data — an especially aggravating procedure in busy periods. 
Collections also are handled to better advantage, since the 
amount originally figured, the investment to date, bills ren- 
dered, and payments made are all in one place for comparison. 

At the trial balance periods, which usually come at the end 
of each month, the various divisions of the debit on the primary 
sheet are all totaled and brought into agreement with the 
investment. The labor and material items in the cost on the 
secondary sheet also are totaled and made to agree with the 
labor and material on the primary sheet ; thus each month the 
entire ledger is in a state of perfect balance. The time entailed 
in gaining this result is not great, since there are very few 
entries in each column of the secondary sheet. This facilitates 
rapid work, and a ledger containing approximately two hun- 
dred and fifty buildings is balanced in about two and a half 
days. 



172 HOW TO FIND FACTORY COSTS 

When a contract is finished, the secondary sheet is ruled off 
and totaled, and the labor and material costs are divided by the 
units installed on each class of work. This gives the unit cost. 
The summary of the detailed cost is written at the top of the 
sheet. In this position it appears opposite the estimate, and 
the two sets of figures can readily be compared. The data are 
also entered in the general costs, from which new estimates and 
controlling figures are compiled and present ones corrected. 
After the contract is paid for, any soil, pencil or ink markings 
are removed with an eraser and the sheets are filed dead by 
number. 

When profit or loss is taken off at the end of fiscal periods 
or when the work is completed, notations of the entry are made 
in green ink to differentiate it from other entries. The profit 
is entered under the credit column, the green ink being treated 
the same as a red ink entry; that is, as a deduction. 

If, on the other hand, the contract shows a loss, the amount 
is entered in black, although the notations of the entry are made 
in green, and the black figures are, of course, added to the credit 
to offset the higher investment. The profit or loss should never 
enter into the debit or investment column, or confusion will 
result. While it is unnecessary to use green ink for these 
entries, I have found the practice extremely convenient as the 
color stands out prominently and quickly attracts the eye. 

I have found it advisable in complicated work to use a 
"construction detail" book, the sheets being the same size as 
the primary, or preferably the secondary sheets, of the main 
account. The object of this book is to centralize in one place 
such details of the installation as the following: 

Character of the work 

Quantity of material to be installed, together with style, size and 

other identifications 
Record of shipments or purchases to prevent excess deliveries 
Conditions and progress in brief 

When the contract is finished, the construction detail sheets 
are filed dead with the account sheets, furnishing complete 



COSTS AND BIDS 173 

detail for future reference. The methods set forth may appear 
to necessitate considerable time in entering; but if the items 
are properly prepared before the posting is done, little addi- 
tional work is entailed for the bookkeepers. It is a simple mat- 
ter to classify and arrange the entries properly and I believe 
it requires no additional time. Furthermore, any book carried 
in detail should be "self-balancing," a feature highly recom- 
mended because of the accuracy insured. 

A GOOD COST SYSTEM AS A REMEDY FOR 
SLEEPLESS NIGHTS 

The amount of expense entailed in caring for such a system 
is small, and the accounts for two hundred and fifty current 
contracts are easily handled by two bookkeepers, who are also 
able to care for the other books of the company. 

The value of a system of this character to me is incalculable. 
With it, I have facts backed by figures conveniently at hand, 
on which to base my estimates, and I spend no sleepless nights 
wondering if I am going to make a profit or incur a loss on any 
contracts. It is quite impossible for me, unless very unusual 
circumstances arise, to "fool" myself. 

Two points materially differentiate the contractor's finan- 
cial statement from that of the merchant. These two points, 
however, have not been generally emphasized by contracting 
accountants. Heretofore, except' in a few instances, practi- 
cally no attention has been given them. Their importance, 
nevertheless, is so great that without them no working state- 
ment or financial report can be compiled that will give an 
adequate idea of the condition of the business. 

The point's to which I refer, once their importance is fully 
realized, can be quickly located. They are : 

(1) The equity in contracts under construction; 

(2) The profit on contracts under construction. 

What do I mean by the first? Just this: for every dollar 
expended in the prosecution of a contract a holding is estab- 
lished, which includes the amount expended plus the profit 



174 HOW TO FIND FACTORY COSTS 

thereby earned. If twenty-five per cent gross profit is figured, 
then for every dollar invested the holding * is $1.33j. If $1.15 
has been billed,t the equity is the difference — or 18.3 cents. 
The equity is therefore the portion of a contract that has been 
executed, with its profit, less the total bills rendered thereon. 
Expressed otherwise, it is the "unbilled" portion of the work 
done on a contract, plus the earned profit. The assets of a firm 
must therefore include this item. Without it, the report is 
seriously in error. 

DETERMINING THE PROFIT ON WORK 
UNDER CONSTRUCTION 

Obviously, the profit on work under construction must be 
determined before the equity can be obtained. Some method 
must be devised to estimate the profit as the work progresses 
and also to care for it on the books. 

Material, unless installed, in almost all cases is not billable; 
therefore, until it is installed, it is not included by architects or 
owners in the payments. Considerable material must be on the 
ground to keep the men busy, and as the uninstalled material 
can not be removed without consent of the owners, the latter 
have a holding on it and it should be considered a part of the 
investment. 

The amount of material on the ground is dependent upon 
the number of workmen, since men who are carefully chosen 
and supervised work consistently. The amount of material 
installed is therefore directly proportionate to the producing 
labor. I can not obtain any payment for the material on the 
ground not yet installed, but I can bill and be paid for the 
labor and the material that the labor puts in. The only deduc- 
tion possible from these facts is this : the producing labor estab- 
lishes the profit. Since the equity is the investment plus the 
earned profit, and since the producing labor determines the 

* Gross profits must be figured on the billing value, not on the cost. 
fWhen an amount is billed, it immediately goes into the "Accounts Receivable" 
and this latter asset shows automatically. 




HOW ONE PLANT ISSUES SPECIAL TOOLS 

A three months' supply of tools, valued at $90,000, is carried in the central tool 
room at the Pullman Company's plant. The run of tools is issued from special 
branches in the various departments. These men are applying directly to the 
central iool room for special tools which must be returned before closing time. 
This careful check on special tools helped to regulate costs 




THOUSANDS OF DOLLARS' WORTH OF RAW MATERIAL SAVED 

When the Pullman Company started to use a system that carefully checked on 
costs and methods, they found that a "shortage" of as many as a million bolts had 
been recorded at the end of a job. After the system was in operation a loss half 
as large was considered out of the question. The saving on raw materials alone 
thus amounted to thousands of dollars 






COSTS AND BIDS 177 

profit, it therefore follows that the producing labor is the basis 
upon which to figure profit. I thus have solid foundation for 
estimating the profit and equity on work under construction. 

The determination of "profit on work under way" is not 
difficult; but placing it on the books periodically and automatic- 
ally is a problem that has puzzled accountants most. 

I have always run an analysis and cost on all contracts, 
whether large or small. The investment or debit of the account 
is divided into the following: 

Labor 

Material 

Expenses, covering those of the men, freight, drayage, and other 

expense items 
Sundry expenses, embracing commissions and items other than the 

actual expenses 

As the contracts are completed I tabulate the analysis 
according to the classes of work, such as schools, churches, office 
buildings, factories, residences, and other divisions, as shown 
in Table I. This enables me to amass percentages like those 
shown, giving for each class of work the relation expressed in 
a percentage, of the labor, material, and so on, to the total 
investment, billing value and profit, and the relation of each of 
these items to the other. 

Looking back over the records of the company for three 
years I found that, of the total contracts handled, in no year 
did the profit drop below twenty-four per cent, and that it 
averaged twenty-five per cent. The running expenses aver- 
aged around nineteen per cent. 

In estimating the profit I needed to be sufficiently conserva- 
tive to allow for unforeseen fluctuation in the percentages, and 
yet hold the profit above the expenses, I felt' that two to three 
per cent was an ample margin; and if I could provide actual 
figures to check the percentages against, in order to prevent the 
estimated profit from running wild, I would be quite safe. 

To provide such a safeguard, I placed on the report the 
finished business, with the actual profit earned thereon and the 



178 HOW TO FIND FACTORY COSTS 

percentage. This showed exactly what was being realized and 
indicated the margin I was operating under. With this check 
continually before me I had no opening through which to stray 
from the trail. 



COMPILED PERCENTAGES 



Sundry Total Contractor Gross 

Expenses Expenses Laboi Material Investments Billing Value Profit 

SehoolS and pubHc work $ 1,848.80 8 8,033.8a $52,788.94 $81,704.20 $144,473.68 $189,205.18 8 44.731.50 

Offlce buildings _„, . 9.941.13 8,659.76 80,609.74 98,671.48 197.882.36 268,100.30 70,217.94 

rttfitories 2.746.30 5,737.42 £8.365.12 36,302.64 73.153.08 65,567.90 22.414.82 

tats, residence* and sundry 

small work... 1,538,06 1.538.79 5,877.24 10,021.83 19,025.94 28,171.22 9.145JSB 

ToHts.,~~« m $16523^1 S23.983.58 SI 67.642 M S225.700.20 $434,535.06 $581,044.60 8146.S09J4 



TYPICAL COST FIGURES 



or the of fiie el the 

Sundry of the of the ol the of the Billing Gross 

Expenses Expenses Labor Material Investment Value Profit 

Sundry expense Is ...„ 67.71% 9.456% 7.157% 3.734% fc7lS& 11.07% 

Expense is _ „ 147.7% 14.29% 10.57% U18% 8.124% t&35% 

Labor is 1033.% 698.7% ... 73J7% 8839% ®M% 1*4.4% 

Material is .1397.% 945.7% 1355% 82.16% 39JW% tSW% 

Investment Is ..2678.% 1813.% 859.1% 191.7% tUt% 896.8% 

Billing value is ^3582.% 2425.% 846.6% 256.4% 133.7% ... 

Gross profit is... 903.1% 6114% $733% 6465% 3JJ2% £&-2% 



TABLE I — The amounts and percentages given here are not taken from any particular busi- 
ness, and do not represent actual conditions in any line. They merely illustrate Mr. Harris's 
method of analysis, and show how he obtains a means of checking up with great accuracy the 

detailed costs on any job. 

Three years' experience is certainly ample to ascertain the 
correct percentage of profit, providing the business is con- 
sistent ; and it was safe to assume that as long as the company 
continued to figure new business on the same profit basis, 
twenty-two per cent would be a conservative figure at which 
to estimate profit for a working statement. This percentage 
would prevail throughout the fiscal year unless something 
unusual demanded a change. Since the reckoning is based on 
the yearly business, which furnishes a splendid cycle for 
"average" calculations, the profit, to be consistent with this 
average, must run throughout the year. 

Figuring the percentage of profit earned to labor invested 
shows that the profit is 87.39 per cent of the labor (Table I). 



COSTS AND BIDS 179 

That is, for every $100 expended for labor, $87.39 profit has 
been earned. On the same chart it appears that the gross profit 
is 25.2 per cent of the billing value. Labor, remember, is the 
most stable element of the cost. 

FIGURING THE PERCENTAGE OF PROFIT EARNED 
TO LABOR INVESTED 

If, now, we decide to take our profit on the basis of twenty- 
two per cent, leaving a margin of safety of 3.2 per cent, then, 
by proportion, we have the following: 



The 

profit 

at 25.2% 



The 
Profit 

at 22% 



Percentage of 
labor on 25.2% 
basis (or 88.39%) 



Percentage of 

labor on 22% 

basis or (76.29%) 



Therefore, at twenty-two per cent gross profit, the percentage 
of profit to the labor is 76.29 per cent. 

After I had secured these facts, I opened two new ledger 
accounts : 

(1) Construction profit and loss estimated; 

(2) Construction profit and loss expense. 

The former see (Diagram VII) carries the estimated profit 
until the end of the fiscal year, at which time an adjustment 
makes it "actual." The latter serves as a depository to hold 
the estimated profit until the adjustment, and is the account 
that produces the profit used in obtaining the equity. 

Placing the estimated profit on the books periodically and 
automatically is now a clerical detail. The bookkeeper multi- 
plies the producing labor on the payroll by the percentage to 
obtain the profit, and then makes the following entry : 

Debit construction profit and loss suspense $2375.42 

Credit construction profit and loss estimated 2375.42 

This records, we will say for the sake of example, the profit 
on contracts under construction for week ending June 24th, 
1915, estimated at 76.29 per cent of the producing labor. The 
value of this method will instantly be seen. On every report, 



180 



HOW TO FIND FACTORY COSTS 



PROFIT AND LOSS ENTRIES 



CONSTRUCTION PROFIT AND LOSS 
(SUSPENSE) 



DR. 



CONSTRUCTION PROFIT AND LOSS 
(ESTIMATED) 



CR. 



ESTIMATED PROFIT 

(TAKEN OFF WEEKLY 

ON THE BASIS 

OF LABOR) 



DR. 



ACTUAL PROFIT 

(TAKEN FROM 

CONTRACTS 

COMPLETED DURING 

THE YEAR) 



CR. 



BALANCE FROM 
"SUSPENSE" ACCOUNT 

(PROVIDED THE 
BALANCE IS A DEBIT) 



"PARTIAL ACTUAL" 
PROFIT 

(FIGURE SECURED 

BY AN ANALYSIS 

AT END OF THE YEAR 

OF THE COMPLETED 

WORK ON EACH 

CONTRACT) 



BALANCE 

REPRESENTS VARIATION 
OF ESTIMATED FROM } 
THE ACTUAL PROFIT 



ESTIMATED PROFIT 

(TAKEN OFF WEEKLY 

ON THE BASIS 

OF LABOR) 



mmm __Y 

BALANCE FROM 

"SUSPENSE" 

ACCOUNT 

(PROVIDED THE 
BALANCE IS A CREDIT) 



i „ 



BALANCE 

REPRESENTS 

THE ACTUAL PROFIT 

FOR THE YEAR 



DIAGRAM VII 

This is an analysis of some phases of Mr. Harris's interesting and successful plans for making 
costs and bids agree, which he describes in detail in chapter XIII. 






COSTS AND BIDS 181 

weekly or monthly, appears the conservative estimate of the 
percentage of profit earned on the contracts — a fact made pos- 
sible by knowing the earning power of labor. 

Estimated profit, as it is taken off, is charged to the sus- 
pense account. Actual profit on contracts as they are finished 
is credited to that account. The difference is the amount of 
estimated profit outstanding on contracts still under way, and 
is the amount to be added to the investment on contracts under 
construction in order to obtain the equity thereon. 

THE VALUE OF A COMPARISON OF ESTIMATED WITH ACTUAL PROFITS 
ON FINISHED CONTRACTS 

Actual profit on the finished contracts should average 
around twenty-five per cent; while the estimated profit is taken 
at twenty-two per cent. The difference of about three per 
cent is the conservative margin that allows for possible emer- 
gencies. Since my estimated profit was below the "averaging" 
point of the actual, the equity is understated this same slight 
amount. 

At the end of the year a careful, individual analysis is made 
of the contracts under construction at that time, and the actual 
profit is taken on each on the branches of the contracts that are 
finished. This "partial actual" profit is also credited to the 
suspense profit, and added to the actual already taken off on 
contracts finished, making a total actual profit during the year 
on completed work. 

The "actual" or credit side of the account' at the end of the 
year should be greater by the difference of the conservative 
margin than the estimated or debit side, providing the contracts 
are realizing the profit' figured. If the estimated percentage is 
more than the contracts are netting, then the difference will 
be on the debit side. 

The difference, debit or credit, or the variation of the profit 
for the year from the estimated, is now transferred to "con- 
struction profit and loss, estimated," bringing that account to 
the actual figure. 



182 HOW TO FIND FACTORY COSTS 

My method does not hide the actual profit made on con- 
tracts nor does it cover up in any way the condition of the 
business. On the contrary, it assists in stabilizing a "wobbly" 
business, and proves indispensable in financial statements. 

With the profit disposed of, we can now consider the equity. 
As I have pointed out, this consists of the investment plus the 
profit earned, and less the amount billed. The detail indicating 
how this is worked out is shown in Form 50. 

PITFALLS TO LOOK OUT FOR WHEN 
DETERMINING THE EQUITY 

This appears to be a simple matter to determine each month, 
but when contracts are completed, the profits taken off and the 
accounts balanced, the investment is decreased accordingly. 
Unless some arrangements are made to take care of this 
decrease, the statement of equity is incorrect. Here is another 
knot to untangle. Either one of the two methods described 
below may be used, but I prefer a combination of both, in which 
less time is consumed and results are sufficiently accurate to 
make it the most desirable. 

The first method is to have the bookkeeper, instead of tak- 
ing off the "balances," as is usual, list, on each contract in force, 
the following four items* : 

Debit (investment) 

Credit (amount billed) 

Contract value 

Partial actual profit taken previously 

If the contracts are numerous, the work required when this 
method is used often takes so much time that the report is 
delayed several days, and the expense is not justifiable. Some 
shorter cut must be devised. 

The second method is to carry, on the "construction control- 
ling account" in the general ledger, an analysis fly sheet with 

* I credit all returned material, and so on, to the investment on the construction 
ledger accounts by entering it in red ink and deducting it from the debit, rather 
than entering it in the credit and spoiling the information given in both columns. The 
same is done in connection with the amount billed. This keeps the debit and credit 
"net" and they are thus purely "investments," and "amounts billed," respectively. 



COSTS AND BIDS 183 

columns for the detail. The totals are entered in the same way 
as in the first method, at the commencement of the year ; and 
the additional investment, bills rendered, and so on, are added 
as posted, while the details of the contracts as they draw to a 
close are subtracted. The analysis columns are thus "running 
totals" of the contracts in force. 

The method I prefer follows. The method I have just 
described may be pursued throughout the year, but it is checked 
every three, four or six months by taking off a new list, as 
described in the former method. I check every three months 
and have found it a splendid means for insuring accuracy and 
speed, and keeping down expense. 

Some accountants may criticise the plan of taking profit 
on work under way. It has been contended that this profit 
should rest until the work is completed, in order to be accurate. 
If, however, a business is consistent and the profits are gov- 
erned accordingly, there is no reason why they should not be 
taken periodically. Expenses are accumulating and the com- 
parison of profits with expenses is the only way of knowing 
where the business stands. 

But it is simple to arrive at the amount expended for labor, 
and also to figure its relation to past work. It is therefore 
easy to establish the equity and profit on any work in force, 
within a safe margin. The simplicity, effectiveness and possi- 
bilities of the method I use have a strong basis of appeal for the 
practical man who really wants to know where his business 
is at. The amount of business completed for any period is 
obtained from the percentages, and estimates of labor, 
expenses, or any item on future work may be compiled in the 
same manner. 

I have found my method practical and successful in opera- 
tion, and extremely valuable in settling the affairs of partners, 
selling out a business, and at other times when information as 
to the equity and profits on incompleted work are required. 
Thorough records of the sort I keep give me a control of my 
business that I know no other way of securing. 



INDEX 



ACCOUNT 

-construction 132 

-cost of sales 107 

-finished goods 104 

-indirect expense 107 

-land and buildings 132 

-number 160 

-payroll 105 

-sales 108 

-^shop expense 132 

-stores 102 

-work in process 103 
ACCOUNTING 

-vs. costkeeping 18 
See also Costt 
ACCOUNTS 

-schedule of 102 

-receivable 108 
-how subdivided without needless work 108 
ACCURACY 

-of records, by using individual job card 33 

-importance of obtaining _ 142 

Accurate labor costs, based on individual job card 33 

Administrative expense 24 

-components of 41 

-expert services _ 43 

-proper distribution of 41, 73 

-rent 43 

-supplies 45 

ADVANTAGES 

-of cost system 13 

-of Taylor system of classification 126 

Advertising, how to charge 97 
American Bank Note Company, cost system used 

by the 142 
ANALYSIS 

-laying foundation for 135 

-of contracts 177 

-of costs 110 

-or direct and overhead expenses 24, 27 

-of expense accounts 132 

-of factory records 131 

-of functions 111 

-of general expense 132 

-of indirect charges — See Indirect Costs 

-of shop expense 132 

-sheets 56, 80, 122 

Annual operating rent, how made up 90 

An unusually satisfactory cost system 154 

APPORTIONMENT 

-of inspection costs 47 

-of selling costs 100 
APPRAISAL 

-expert usually necessary 60 

-usual result of not getting expert 60 
Appreciation of property values, how to handle 65 

Assembling type of industry, costs in 21 
Attendants and machine operators, labor cost of 90 
Automobile factory saved money through cost 

system 140 
AUXILIARY EXPENSE 

-further analysis of 136 

-symbol for 135 



B 

Babbage, on uses of cost accounting 14 
BALANCE 

-of stores, checking 38 

-monthly, of accounts desirable 39 

Barker, E. A., mentioned 16 

Base sheet, example of 135 

BASIS 

-of classification of costs 113 

-of general expense division 113 
Benefits, one of the chief, derived from a cost 

system 13 

Bids, making agree with costs 150 
Bill of materials — see Requisition, Stores, Material 

Billing, saving time in _ > 171 

Bindery, result of inexpert appraisal in a 60 

Bond printing 143 
BUILDINGS 

-depreciation of 63, 64 

-symbol for 135 
BURDEN 

-apportioned to departments 148 

-correct apportionment of 71 

-definition of 27 

-included in final cost 147 
BUSINESS 

-government should classify 127 

-expenses, symbol for 135 



CAPITAL 

-borrowed, interest on 58 

-invested, interest on 53 

Carrying the group idea to its logical conclusion 121 

Center, production 85 

Changes in plant value, forced by competition and 

improvement 12 

Charge symbols for expense accounts 127 
Charges, overhead — see Burden; Indirect Cost 
CHARGING 

-accurate, necessary for intelligent action 70 
-delivery costs 98 
-idle time 91 
-improper apportionment may make big dif- 
ference 70 
-indirect expense, rule for 45 
-rent 43 
Chart of course followed by job cards and orders 85 
Checking contracts 160 
Cherrington, Frederick B., chapter by 102 
Claims for overtime reduced S3 
Classes of product, symbols for 135 
Classified time sheet, use of a 155 
CLASSIFYING COSTS 

-by functions 118 

-of labor 88, 155 

-of composing room 119 

-seven successful systems of 121 

-symbols, first steps in 131 

Clerical time saved 171 



185 



INDEX 



Closing indirect expense into the product 
Cole, Professor, mentioned 
Colors, use of, in symbols 
COMPETITION 

-forces change in plant value 

-makes cost system imperative 

-most feared is that of an establishment which 
does not obtain accurate costs 
Compiled percentages 
Composing room of a printing plant, classifying 

activities of a 
Computation of labor time 
Conditions, disadvantageous, remedying 
Constituent elements of cost 
Continuous type of industry, costs in 
CONSTRUCTION 

-controlling accounts 

-detail book 
CONTRACTS 

-analyzed 

-checking 

-record 

-under construction 
CONTROL 

-of expense accounts 

-special charges for purpose of 
Controlling accounts, tying costs into the 
Correcting faults discovered 
Correspondence, current 
COST 

-accounts, what are 

-data needed 

-factory, relation to selling price 

-figures, typical 

-of handling materials, components of 

-of sales account 

-of selling, usual basis of apportionment 

-of tools, how charged 

-requisitions 

-total, components of 

-variations on similar jobs 
COST ACCOUNTING 

-daily expense report 

-distinguished from financial accounting 

-general bookkeeping, how to fit in with the 

-monthly summary, how to make the 

-object of 

-use of 
COST ANALYSIS 

-as a basis for figuring depreciation 

-figures should be used and not treated as 
mere records 

-laying foundation for 
COST DEPARTMENT 

-fitting a system to a business 

-payroll methods 

-requisitions 

-symbol, where it is used 
COSTKEEPING 

-accuracy needed 

-aim and value 

-apportioning general expense 

-data needed 

-purposes 

-variations, on similar jobs 
COST OF PRODUCTION 

-procedure when it includes interest 

-why it should not include interest 
COSTS 

-accurate, an essential feature of good man- 
agement 

-and labor 

-divided into two elements 

-first steps in classifying 

-in a continuous type of industry 

-interpretation of 

-keeping track of 

-knowledge of in business 

-known, as applied in printing 

-making them agree with bids 



73 
63 

113 

12 
12 

14 
177 

119 

83 
40 
23 
18 

181 
172 

177 

160 
160 
173 



50 
107 

40 
160 

18 
185 
23 
178 
45 
107 
100 
51 
88 
27 
158 

52 

18 
102 
52 
18 
14 

160 

52 
135 

1S7 

159 

38 

52 

142 

12 
71 
135 
133 
158 

55 
55 



133 
15, 155 

23 
111 

18 
140 
101 
132 
142 
150 



-selling, handling 95 

-reasons for having 150 
COST SYSTEM 

-an unusually satisfactory 154 

-as a remedy for sleepless nights 173 

-distinguishes between profitable and un- 



13 

20 
79 
137 

14 

148 
14,95 
79 
12 
IS 
22 

137 
73 
27 



142 
143 



profitable lines 

-enables you to quickly get factory costs 

-example of good 

-fitting to a business 

-helps to decide whether or not changes in 
design or method are desirable 

-in a tannery, described 

-information that can be obtained from a 

-insurance against disastrous errors 

-made imperative by competition 

-necessary in estimating on new work 

-not based on natural laws 

-reasons for failure 

-should be able to get cost at any time 

-should be as simple as is consistent 

-should be used and not treated as mere 
records 

-that safeguards 

-ultimate test of a 

-used by the American Bank Note Company 142 

-valuable insurance 12 

-value of not realized by some successful 
managers 16 

-what it means to you 11 

-when to discontinue 141 

Counting and checking stores 108 

Course indicated by analysis of costs 14 

Credits to production order 88 

Cross referencing in cost analysis 113 

D 

Daily reports — See Report: Time Report 18, 24 

Daily expense records 52 

Defective material, how charged 50 

Definiteness, in symbols, necessary 114 

DEPARTMENT 

-cost sheets 56-57 

-should bear share of indirect expenses 43 

-which ones to charge with rent 43 

DEPARTMENTAL ANALYSIS 

-expense 24 

-summaries, how made up 52 

-symbol for 185 

-valueless without proper distribution 11 

Department cost sheets 56-57 

DEPRECIATION 

-and factory buildings 68, 64 

-based upon valuation 60 

-caused by neglect 59 

-chapter on 70 

-determination of 60 

-distinguished from maintenance 59 

-due to progress of invention 60 

-fund, provision for 62 

-ignorance regarding 55 

-intermediate, to departments 71 

-of buildings 64 

-of drawings 69 

-of machinery 66 

-of patterns, drawings, sketchc 69 
-of plant value, well-known ways of figuring 61 

-provide for, before declaring dividends 62 

-rate not to use 94 
-should be included in manufacturing cost? 53 

-sinking fund method 62 

-standard rates 63 

-three well-known ways of figuring 51 

-upkeep and related factors 50 

DESIGN 

-experience of New England concern 15 

-undesirability of suitable changes in 14 

Detailed knowledge of cost valuable 182 

Determining profit and loss 179 



186 



INDEX 



DEVELOPMENT 

-of profitable lines, cost system as a guide to 
-work, not charged 
DEWEY DECIMAL SYSTEM OF CLASSI- 
FICATION 

-disadvantages of 
Diet- ting machines were substituted for stenog- 
raphers 
Differentiating profit and loss from other entries 
Diminishing value, use of in figuring depreciation 
DIRECT 

-cost, components 

-labor cost, in tonnage industry 

-labor hours method 

-labor method 

-wages and material method 
Disadvantages of Dewey decimal system 
Disadvantageous conditions, remedying 
Discipline, special charges for the purpose of 
Discontinuing the cost system 
Discovered faults, correcting 

DISTRIBUTION 

-adapting it to your purposes 

-of administrative charges 

-of administrative expense 

-of costs, importance 

-of indirect costs by direct labor hours 

-of indirect costs by direct wages method 
-^>bjection to 

-of indirect costs by direct wages and ma- 
terials method 

-of indirect costs by machine hours method 

-of indirect costs must be in accordance with 
benefits received 

-of indirect expense, rule for 

-of power plant expenses 

-of rent 

-of royalty charges 

-of selling expense 

-of shop expense 
Dividends, provide for depreciation before declar- 
ing 
Division of costs 
Does it pay? 
Done at a loss? 
Drawings, depreciation of 



13 
51 

126 
126 

15 

172 
61 

27 
27 
76 
75 
76 

126 
40 
50 

141 



71 
73 
41 
11 
76 
75 
78 

78 
77 

43 
45 
45 
43 
51 
100 
132 

62 
135 
143 
143 



12 

155 
14 

12 

87 
158 



E 

Economies that may be effected by an analysis of 

costs 

EFFICD3NCY m 

-of time units 

-reflected by cost system 
Electrical specialties company lost $32,000 through 

lack of effective cost system 
Elements of hour rate 
Eliminating variations in reporting time 

EMPLOYEES 

-ingraining accuracy in 142 

-time card _ 29, 147 

Equipment, idle, as an index of fitness 15 

See also Plant 

EQUITY 

-in contracts under construction [111 

-pitfalls to look out for when determining 181 

Error, uncertain percentage always present 22 

ESTIMATED 

-percentage method of distributing direct cost 74 

182 
182 



-profits, how charged 

-comparing with actual profits 

ESTIMATES 

-accuracy of 
-in government work 
-methods used in practice 
-to what chargeable 
-use of cost records for 

Examples of good cost systems 



13,22 

13 

166 

13 
79, 154 



Executives, distribution of salaries of 41 
Expenditures, should always be made on an order 137 

EXPENSE 24 

-account divisions 135 

-accounts, control of 60 

-administrative 24 

-auxiliary 24 

-daily record of 52 

-departmental _ 24 

-factory, apportioned 128 

-legal _ 24 

-percentages, tabulation of 177 

-rule for charging 45 

-shop 182 
-where to charge 45, 70, 68 
See also Cost; Direct Cost; Dis- 
tribution; Indirect Cost 
EXPERIMENTAL WORK 

-how charged # 61 

-when to charge to direct and indirect cost 61 
EXPERT SERVICES 

-distribution of m 43 

-appraisal, result of not having an 60 



Factors in the selling expense 07 
FACTORY COSTS 

-chapter on taking apart 128 

-definition of 23 

-elements composing 21 

-relation of to selling expense 23 

See also Materials; Requisitions; Stores 

Facts the management wants to know 65 

Failure of cost systems, usual reasons for 137 

Faults discovered, correcting 40 

Favoritism in using cost systems 16 

Final cost, meaning of 23, 27 

FINISHED PRODUCT 

-account 104 

-effect of costs on 18 
FINANCIAL ACCOUNTING 

-distinguished from cost accounting 18 

-unit of 18 

FIRST STEPS IN CLASSIFYING 

-costs HI 

-symbols 131 

Figures, typical cost 178 

Four qualities essential to symbols 114 

Foundation for cost analysis 135 

FUNCTIONAL CLASSIFICATION 

-in cost analysis 113 

-how to construct 118 

Fund, depreciation, provision for 62 

Functions, analysis of 111 

G 

Garment factory, cost system would have saved 11 

GENERAL ACCOUNTS 

-accounts receivable 108 

-cost of sales account 107 

-finished goods account 104 

-indirect expense account 107 

-payroll account 105 

-sales account 108 

-tying costs into 102 

-work in process account 103 

GENERAL EXPENSE 

-analysis of 110, 132 

-charge symbols for subdivisions of 132 

Good will, cancellation of when purchased 64 
Goods returned by the customer, how handled 109 

Government should chassify all business 127 

Green, Warren L., chapter by . 142 
Grouping the elements in an analysis of costs 1 13, 126 

Guides to sales, using percentage figures as 65 



187 



INDEX 



HANDLING 

-cost of, components of 45 

-cost of selling 96 

-estimates 166 
Handling purchase orders and stock records — See 

Requisition; Stock; Material 

Harris, H. A., chapter by 150 

Has the job paid? 143 
HEAT, POWER AND LIGHT 

-charge symbols 136 

-distribution 45 

Hidden defects, special account 50 

Hour cost 159 

Hour rate, elements of 87 

How far to rely on machine hour rates 78 

How to apply the machine hour rate plan 85 

How to interpret costs intelligently 140 



Identical transactions, variations in the cost of 158 

Identifying symbols 121 

Idle equipment as an accurate index 15 
IDLE TIME 

-a factor in the machine hour rate 90 

-affected by checking job cards 29 

-charging 91 

-example 93 

-percentage figure 95 
IMPORTANCE 

-of knowing your exact costs 132 

-of properly classifying expense items 167 
Improvements, systematic, in departments and 

individuals 50 

Inaccurate costs brought ruinous competition 14 
INDEX 

-idle equipment an 15 

-ledger, for contracts 160 
INDIRECT CHARGES 

-analysis of 27, 47 

-monthly scrutiny of, by the manager 40 
INDIRECT COSTS. 

-benefits of making up frequently 40 

-closing into the product 73 

-definition 23 

-distribution 74 

-by direct labor hours 76 

-by direct wages 75 

^objections to 76 

-by direct wages and material 76 

-by machine hours 77 

-objection to 77 

-checking accuracy of 87 

-elements of 40 

-final disposition of 74 

-handling 40 

-rule for charging 45 

-should be made up frequently 4o 

INDIRECT COST 

-account 107 

-apportionment of 71 

-components of 27 

-consequences of neglect 25 

-how ascertained 47 
Indirect labor cost, how affected by checking job 

cards 29 
INDIVIDUAL 

-improvements in efficiency of the 50 

-job cards 31 

-basis of accurate labor cost 33 

-description 31 

-eliminates the costly time card system 33 

-use of 31 

-record cards 31 

INDUSTRY 

-costs in assembly type of 21 

-costs in continuous type of 18 

Ingraining accuracy in employees 142 



INSPECTION COSTS 

-charging to specific job 47 

-how handled 47 

Insurance by cost system against loss 12 
INTEREST 

-avoiding duplication of charges 43 

-procedure when included in production cost 55 

-why it should not be charged to production 55 

Interesting example of good cost system 79 

Interlocking cost accounts with financial accounts 18 

Interpreting costs 140 

Inventions and inventors 60 
INVENTORY 

-annual, notoriously inaccurate 89 

-of stores and work in process 108 

-perpetual 37 

-should be frequently checked 88 

Items of unit cost 165 



Job summaries, specific 82 

Judgment, good, in use of cost system 22 

JOB CARD 29 

-result of carelessness in checking 29 

-indicating actual time used, on 81 

-individual, use of 81 

-description 81 

-basis of accurate labor costs 33 

-eliminates costly time card system 38 

-routing and charting 85 

Janitor service, how charged 50 

K 

Keeping a close check on contracts 160 

Keeping the cost down 155 

Keeping track of selling costs 101 
Knowledge the management wants and ought to 

have 95 



LABOR 

-cost of machine operators and attendants 90 

-first consideration of a cost system is the 155 

-record of charges 168 

-saved by a knowledge of costs 15 

-time, computation of 83 

Labor costs, accurate, are based on individual job 

card 83 

Labor distribution — See Distribution 

Land and buildings, a symbol for 135 

Laying the foundation for your cost analysis 135 

LEDGER 

-index for contracts 160 

-secondary 165 

-sheets 164 

LIGHT 

-distribution of expense for 45 

-symbols 136 

LOSS 

-and profit, differentiated 172 

-due to ignorance of costs 151 

M 

MACHINE 

-as a production center 85 

-charging indirect costs to the 45 

-cost as element in machine hour rate 88 

-depreciation of 64 
-hour rate plan is the best for many reasons 84 

-operators and attendants, labor cost of 90 
MACHINE HOUR METHOD 

-checking its accuracy 78 

-for the distribution of indirect costs 77 

-objection to 78 



188 



INDEX 



87 



MACHINE HOUR RATE PLAN 84 

-charging administration expense 89 

-an example 
-charging factory expense 
-building expense 

-departmental expense 88 

-idle time as a factor in 90 

-machine cost as element in 88 
-once determined, its application is very simple 85 

-specific machine cost as an element in 88 

Machinery, symbol for 135 

MAINTENANCE CHARGES . 

-distinguished from depreciation 59 

-distribution 50 

-how obtained 47 
^once determined, application is very simple 85 

Making costs and bids agree 150 

Making it easy to remember symbols t 117 

Management, accurate costkeeping is an essential 

part of good 132 

MANAGER 

-fails often because of guessing 11 
-some successful ones do not realize the value 

of an accurate cost system 16 

Manufacturing account 103 

Market conditions, fitness of organization for 15 

MATERIAL 

-accounting for S5, 142 

-bill of 168 

-charges, record of 135 

-cost of handling 45 

-formerly wasted is accounted for 88 

-records 85, 36 

-requisition for 37, 168 

-returned, should be credited to the Job 38 

-routing and charting 35 

-spoiled, how charged 50 
-summary of requisitions for — See Requisitions 

-uninstalled 174 
-unused on a job, should be returned to stores 38 

-waste, accounting for 38 

METHODS 

-of classifying costs 110 

-of figuring depreciation 61 

-undesirability of change in, is shown 14 

Minute knowledge of cost details is valuable 132 

MNEMONIC SYMBOLS 

-how to use 114 

-Taylor system of 117 

Money a unit of cost 23 

Monotype keyboard, classification of a 119 

N 

National Regulator Company, the, mentioned 150 

Neglect, the effect of upon depreciation 59 
New work, the need of a cost system in estimating on 13 
Non-producers, the number of, is no measure of 

efficiency 25 
NON-PRODUCTIVE 

-labor 24 

-use of the term 24 

Numbers, their use in symbolization 118 

Numeric system, the 121 



o 



90 



Operating rent, annual, how it is made up 
Order blank — See Materials; Requisition; Stores 
ORDERS 

-production, crediting the surplus material to 38 
-routing and charting of 35 

Original cost, how used in figuring depreciation 61 
OVERHEAD 24 

-administration costs 24, 41, 73 

-amount of, how to find it accurately 40, 47 

-analyzing the 37, 47 

-charges, the relation between, and total 

cost 27, 40, 47 

-expense, analysis of 27, 47 



-expense, how to control 

-items in, a list of 

-machine rate, distributing burden by 

-method of distributing the 


40 
27 
77 
40 


OVERTIME 




-saving excess 
-saving clerical 
Over-refinement unnecessary 


83 
171 

22 



Packing and shipping, how charged 99 

Parts constructions, symbol for 135 

Payroll account 105 

Payroll, recording time reports on the 159 

Percentages, compiled 177 

Percentage figures, using as a guide to sales 95 

Percentage on diminishing value plan 61 

Percentage on original cost plan 61 
PERPETUAL INVENTORIES 

-machinery for keeping 37 

-should be frequently checked 88 

Personality, effect of, on time reported 158 

Pins, reduction in cost of, how effected 14 

PLANT 

-depreciation of 60 

-interest on 43, 53, 55 

-small, applying the principles to a 119 

Policy in charging idle time 91 

POTTERIES 

-cost of, how it is charged 51 

-depreciation of 69 

Power, heat and light, charge symbol for 186 
POWER PLANT 

-distribution of the expense for the 135 

-symbol for 185 

Preliminary expenses should be cancelled quickly 64 

Price change made by cost system 140 

PRICE 

-its relation to the factory cost 23 
-putting it on the requisition 37 
-as a basis for figuring depreciation 61 
Price record — see Materials; Requisitions; Stores 
Printing plant, classifying the activities of a com- 
posing room 119 
Printing bonds 148 
Product i3 a unit of cost 23 
Productive and non-productive labor 24 
PRODUCTION CENTER 85 
-charging it with its share of factory expense 87 
-production records for the 95 
Production, the influence of cost on the 16 
Production department, resources of, used by the 

sales department 15 
PROFIT AND LOSS 

—determining 179 

-differentiating 172 

-should rent be charged to it? 43 

-statement 83 

Profits are not made until product is sold 96 

Profits on contracts under construction 173 

Profitable lines distinguished from unprofitable 13 

Profitable production, influence of cost on 16 

Property, appreciation of, how to handle 64 

Purchasing — See Materials; Requisitions; Stores 

Purposes of costs 12, 132 



R 



Rates, care in setting 84 

-checking 78 

-how far can 7ou rely on 78 

-machine hour 77 

Rate of depreciation, the standard 63 

Raw materials — See Material; Stores 

Raw material supply, how it is reduced by knowl- 
edge of costs 15 

REASONS 

-for the failure of some cost systems 137 

-for having a cost system 150 



189 



INDEX 



Receivership might have been saved by a good 

cost system 1 1 

Reclaimed material, how handled 88 
RECLAMATION OF ERRORS 

-special account for 50 

-how the charge is made up 40 

Recording of time reports, simplifying the 158 
Records of daily expense should not be mere cost 

figures 52 

Records of cost, their purpose 12, 132 
RECORD 

-of labor charges 168 

-of material charges 35, 142 

Red tape, only certain amount necessary 23 

Refinement, expensive, is unnecessary 23 

Regular cost reports 52 
RENT 

-distribution of 43 

-avoiding duplicate charges 43 

-and interest charged to product 55 

-of production center 87 

-annual operating, how it is made up 90 

Replacement expense, how it is charged 99 

Report card, the time m , 158 

Reporting time, the elimination of variations in 158 

Reports, checking the accuracy of • 33 

REQUISITION . 87, 168 

-for supplies should show distribution 48 

See also Materials 

Results should be carefully watched 158 

Routing, classification, the 111 

ROYALTY CHARGE 

-how it is obtained 51 

-distribution of 51 

Rule for charging the indirect expense 45 

Rush jobs, a simple way of handling 82 



SALES 

-account 108 

-cost of, account 107 
-department using the resources of production 15 
-department using the knowledge of cost as 

spur to greater sale3 15 
-using percentage figures &3 guide to 95 
Saving of clerical labor in the bookkeeping 171 
Scrap and scrap value in figuring depreciation 61 
Scrutiny, monthly of indirect charges by the man- 
ager 40 
Secondary ledger sheets 165 
SELLING COST 

-components of 27 

-methods of distribution of the 97 

-price, components of 27 
SELLING EXPENSE 

-components of 23 
-charge symbols for 135 
-handling the 96 
-how one concern apportions its 97 
-its relation to factory cost 23 
-should be considered apart from the factory 
cost 96 
SELLING PRICE, THE FACTORS COMPOS- 
ING IT 23 
-sources of 99 
-the usual basis of apportionment 100 
-keeping track of the 100 
Sheet, classified time, use of the 155 
Shipping and packing, how charged 99 
Shop cost, what it includes 132 
Significant symbol, a good example of a 118 
Simple way to handle rush jobs 82 
Simplicity in itself is no virtue 114 
Simplifying the work of recording 159 
Sinking fund method 62 
Sketches, the depreciation of 69 
Sleepless nights avoided by knowledge of your costs 173 
Small items are important 85 
Small plant, applying the principles to a 119 



SPECIAL ACCOUNTS 

-accounts receivable 
-finished goods 
-indirect expense 
-payroll 
-sales 
-work in process 



10& 
104 
107 
105 
108 
103 



Specialty concern, how one apportions selling cost 97 

Specific job summaries 52 

Spoiled material, how it is charged 50 

Standard rates of depreciation 63 

Staynes, W. H., material by 148 

Stenographers replaced by dictating machines Iff 
STOCKKEEPING 

-inventory cards that keep your stock up to 

date 37 
-material, some methods of accounting for 87 

-methods in 142 

-perpetual inventory, how to use a 87 

-printers' methods of 142 

-requisition, how to use the 37 
Stock — see Material; Stores 

Store account in the general ledger 102 

Store system, requirements of a 142 
STORES 

-and work in process inventories 108 

-credited with returned material 88 

-keeping track of the 85 

-requisition, what it should cover 87 

See also Material; Work 

Subcontracts, how they are handled 168 

Summarizing the cost 149 

SUMMARY 

-of jobs delivered 147 

-monthly departmental 52 

Sundry expenses 177 

Superfluous costs 24 

SYMBOLS 

-cost, where used 52 

-a clear explanation of seven systems of 121 

-effect labor saving in cost analysis 114 

-first step in classifying 131 

-four requirements of good 114 

-identification of 121 

-making it easy to remember the 117 

-significant, a good example of some 118 

-Taylor system of 117 

-use of numbers in 118 

Synthesis, use of in classifying costs 110 
SYSTEM 

-cost, a, that safeguards 142 

-cost, a, as a remedy for sleepless nights 173 

-example of a good 114 

-of symbols, a good 82 



Taking factory costs apart 128 

Tannery, cost system in a 148 

TAYLOR SYSTEM OF MNEMONIC SYM- 
BOLS 117 
-advantages of the 126 
-why it is used in "scientific management" 

works 127 

Test, the ultimate, of a good cost system 143 

TIME CARD 

-daily, used to get direct labor costs 29 
-workman's, how it i3 used 29, 147 

-system is eliminated by job cards 83 

TIME 

-how it is computed and recorded 159 

-idle, as a factor in the machine hour rate 90 

-keeping and payroll systems 159 

-report 158 

-unit, the relative efficiency of the 155 

TONNAGE TYPE OF INDUSTRY 

-cost in 18 

-finding the direct labor costs in 27 

Tools, cost of, how it is charged 61 

-symbol for 183 



190 



Total cost, the elements of 23, 27 

Total summary card, a form for 14 

Traffic department expense 99 

Tying costs into he general accounts 109 

Typical cost figures 172 

• . u 

Ultimate test of a good cost system 143 

Universities, it is the duty of the, to classify 

business 127 
Unprofitable lines shown up by the cost system 13 

Use of cost accounting 14 



Valuation, depreciation when based upon, 

general 
Value, the scrap, in figuring depreciation 



Variations in reporting time, eliminating the 
Ventilating expense, distribution of the 

w 

Wastage of stock, accounting for the 

Watchman, charging the cost of the 

Water, distribution of expense of 

Ways of figuring depreciation 

What goes to make up your costs 

What the management really wants to know 

When to discontinue a cost system 

Where some cost systems fail to make good 

Why "one-3ung"businesses never get well 

Why the Taylor system is used in "scientific matt 

agement" works 
WORK IN PROCESS 

-accounts 

-inventories 



158 
45 



88 
47 
45 
61 

23 

95 

141 

137 

129 

127 

103 
108 



Ml 



H' 284*84 








r VV* 










#+<h> 










"b^ 




> w -%. 

















V^> %?^v V^ f / %-^-/ <: 



W 










■P V .* 



£ /\ WW **% *J>E" <f'\ '2 . 

«.^ for. ^^° ^ ^^ .' 







^ 






-j>V 





<. v?7i* «P y *v», *..?• A <» 

A*" '^ *•".»« A ^j 



V^ 1 



5? ^ »; 













iPvS 






> ^ 



rf 



ST. >. ^ ^WV\ ^ -^ 












1 ^k!l*. ^ 



A"> ^ * 




** ^ 



W > 

^ 










6*^ 






wy v-^V vwy v^V v 



«b<P 



r.»^.*ft 



o, * 










> «,. A* 


















/*€&% X*> ^Ste\> ***£b&7* 





^ %^«v\/'.- 







*2» 






HECKMAN 
BINDERY INC. 

ffi$>> 1984 



<?yj^\ 




N. MANCHESTER, 
INDIANA 46962 



%. 






s » • * **> 



i^*W v .«*&«& '* >vi fc'v j* a 



